Arbitrage-Based Tests of Target-Zone Credibility: Evidence from ERM Cross-Rate Options
AbstractThis paper introduces two arbitrage-based tests of target-zone credibility using a new data source, exchange-rate mechanism cross-rate options. Using daily option prices from September 1991 to August 1994, the authors assess the credibility of the pound-mark and mark-lira target zones that collapsed in September 1992 and the ongoing mark-French franc target zone. These tests are based on restrictions that must apply to all option prices within a credible target zone and are free from specification error and estimation error. The authors also identify a minimum 'intensity of realignment,' an expression indicating the probability-weighted average realignment size. Copyright 1996 by American Economic Association.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 86 (1996)
Issue (Month): 4 (September)
Other versions of this item:
- Campa, J.M. & Chang, P.H.K., 1995. "Arbitrage-Based Tests of Target Zone Credibility: Evidence from ERM Cross-Rate Options," Papers 95-25, Columbia - Graduate School of Business.
- F30 - International Economics - - International Finance - - - General
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F39 - International Economics - - International Finance - - - Other
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