22 Pages Posted: 3 Dec 2016
Date Written: December 2, 2016
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: 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