1 option
Implied Exchange Rate Distributions: Evidence from OTC Option Markets / Jose M. Campa, P.H. Kevin Chang, Robert L. Reider.
- Format:
- Book
- Author/Creator:
- Campa, Jose M.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w6179.
- NBER working paper series no. w6179
- Language:
- English
- Subjects (All):
- Foreign exchange--Periodicals.
- Foreign exchange.
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- Implied Exchange Rate Distributions
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 1997.
- Cambridge, Mass. : National Bureau of Economic Research, 1997.
- Summary:
- This paper uses a rich new data set of option prices on the dollar-mark, dollar-yen, and key EMS cross-rates to extract the entire risk-neutral probability density function (pdf) over horizons of one and three months. We compare three alternative smoothing methods---cubic splines, an implied binomial tree (trimmed and untrimmed), and a mixture of lognormals---for transforming option data into the pdf. Despite their methodological ifferences, the three approaches lead to a similar pdf distinct from the lognormal benchmark, and usually characterized by skewness and leptokurtosis. We then document a striking positive correlation between skewness in these pdfs and the spot rate. The stronger a currency the more expectations are skewed towards a further appreciation of that currency. We interpret this finding as a rejection that these exchange rates evolve as a martingale, or that they follow a credible target zone, explicit or implicit. Instead, this this positive correlation is consistent with target zones with endogenous realignment risk. We discuss two interpretations of our results on skewness: when a currency is stronger, the actual probability of further large appreciation is higher, or because of risk, such states are valued more highly.
- Notes:
- Print version record
- September 1997.
- Includes bibliographical references.
The Penn Libraries is committed to describing library materials using current, accurate, and responsible language. If you discover outdated or inaccurate language, please fill out this feedback form to report it and suggest alternative language.