Numeraire Dependence in Risk-Neutral Probabilities of Event Outcomes

The Journal of Derivatives, Forthcoming

23 Pages Posted: 8 Feb 2018 Last revised: 31 Dec 2018

See all articles by Michael Hanke

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: March 6, 2018

Abstract

For most events, risk-neutral outcome probabilities are identical across numeraire currencies. Some events, however, such as elections or referendums, may have an impact on exchange rates. This implies numeraire dependence in risk-neutral outcome probabilities, which leads to different state prices for affected currency pairs. If betting odds available to punters do not reflect these differences, this may give rise to (approximate) arbitrage opportunities. Despite the sizable risk this creates, odds quoted by bookmakers seem to ignore this effect.

Keywords: betting odds; political events; exchange rate risk

JEL Classification: G13, G15, F31

Suggested Citation

Hanke, Michael and Poulsen, Rolf and Weissensteiner, Alex, Numeraire Dependence in Risk-Neutral Probabilities of Event Outcomes (March 6, 2018). The Journal of Derivatives, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3113453 or http://dx.doi.org/10.2139/ssrn.3113453

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, 39100
+39 0471 013496 (Phone)

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