The Sovereignty Option: The Quebec Referendum and Market Views on the Canadian Dollar
Posted: 17 Oct 1996
Date Written: June 1996
We use exchange traded options on Canadian dollar futures to estimate the market's risk-neutral distribution for the Canadian dollar in the days before and after the Quebec sovereignty referendum. We employ a relatively new technique that places little a-priori structure on the estimated distribution. This lack of structure allows the estimated distribution to reflect the multi-modal nature of expectations associated with the referendum's results. The technique is especially suited to circumstances in which a particular event will reduce a large degree of uncertainty prior to the expiration date of the options. Our estimated distributions are consistent with a significant perceived probability that the Canadian dollar would move up or down by as much as 5 percent as a result of the vote.
JEL Classification: C14, C53, F31, G13, G14, G15
Suggested Citation: Suggested Citation