Event-Related Exchange Rate Forecasts Combining Betting Quotes and Risk-Neutral Densities from Option Prices

22 Pages Posted: 3 Dec 2016  

Michael Hanke

University of Liechtenstein

Rolf Poulsen

University of Copenhagen - Department of Statistics and Operations Research

Alex Weissensteiner

Free University of Bolzano/Bozen

Date Written: December 2, 2016

Abstract

Betting quotes provide valuable information on market-implied probabilities for outcomes of events like elections or polls, which may have an impact on exchange rates. We generate exchange rate forecasts around such events based on a model that combines risk-neutral probabilities implied in betting quotes with risk-neutral densities extracted from FX option prices. An application of the model to predict exchange rates around the UK Brexit referendum and the US presidential elections shows that these forecasts - conditional on the outcome of the respective event - were quite accurate, and markets were able to separate their views on the likelihood and the impact of these events.

Keywords: exchange rates, forecasting, risk-neutral densities, betting quotes

JEL Classification: F31, F37

Suggested Citation

Hanke, Michael and Poulsen, Rolf and Weissensteiner, Alex, Event-Related Exchange Rate Forecasts Combining Betting Quotes and Risk-Neutral Densities from Option Prices (December 2, 2016). Available at SSRN: https://ssrn.com/abstract=2879466

Michael Hanke (Contact Author)

University of Liechtenstein ( email )

Fuerst Franz Josef-Strasse
Vaduz, FL-9490
Liechtenstein

Rolf Poulsen

University of Copenhagen - Department of Statistics and Operations Research ( email )

Universitetsparken 5
DK-2100
Denmark
+45 (353) 20685 (Phone)

Alex Weissensteiner

Free University of Bolzano/Bozen ( email )

Universitätsplatz 1
Bolzano/Bozen, 39100
Italy
+39 0471 013496 (Phone)

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