Event-Related Exchange Rate Forecasts Combining Information from Betting Quotes and Option Prices
Journal of Financial and Quantitative Analysis, 53(6), 2663-2683
Posted: 3 Dec 2016 Last revised: 9 Jun 2020
Date Written: June 28, 2017
Betting quotes provide valuable information on market-implied probabilities for outcomes of events like elections or referendums, which may have an impact on exchange rates. We generate exchange rate forecasts around such events based on a model that combines risk-neutral event probabilities implied from betting quotes with risk-neutral exchange rate densities extracted from currency option prices. Its application to predict exchange rates around the Brexit referendum and the U.S. presidential elections shows that these forecasts – conditional on the respective outcomes – were 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: Suggested Citation