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Event-Related Exchange-Rate Forecasts Combining Information from Betting Quotes and Option Prices

Published online by Cambridge University Press:  20 August 2018

Michael Hanke ,
Rolf Poulsen  and
Alex Weissensteiner
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Abstract

Betting quotes provide valuable information on market-implied probabilities for outcomes of events such as 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 6 , December 2018 , pp. 2663 - 2683
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Jennifer Conrad (the editor) and Stephen Figlewski (the referee) for their helpful comments, and we thank Johannes Sivén, who provided part of the data and commented on earlier versions of the article. Poulsen was partially supported by the research center HIPERFIT funded by contract number 10-092299 from the Danish Strategic Research Council.

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