ERM bandwidths for EMU and after: evidence from foreign exchange options
AbstractAre the wide bands adopted in the summer of 1993 too large? The official answer is that wide bands offer a protection against speculative pressure, while exchange rates may be kept within narrower margins at the discretion of the authorities. Yet if exchange rate fixity and predictability are desirable, as implicitly assumed by the mere existence of the system, there must exist a trade-off between protection against speculative pressure and predictability. In that case, the bandwidth chosen should be as narrow as possible and yet unlikely to be challenged by the markets. This paper offers estimates of 'safe' bandwidths. For the long-term member currencies (French franc, peseta, Danish krone and escudo), the existing 15% bands are found to be unnecessarily wide: narrower 3.5% bands would capture at least 95% of expected exchange rate realizations over a three-month horizon. For the lira, Finnish markka and Swedish krone, wider bands of 5-6% would capture a similar amount of the exchange rate distribution. The pound's exchange rate expectations are the most dispersed, requiring 8.4% bands to capture 95% of exchange rate expectations. Copyright Centre for Economic Policy Research, Centre for Economic Studies, Maison des Sciences de l'Homme 1997.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by CEPR & CES & MSH in its journal Economic Policy.
Volume (Year): 12 (1997)
Issue (Month): 24 (04)
Contact details of provider:
Postal: 3rd Floor, 77 Bastwick Street, London EC1V 3PZ
Phone: +44 (0)20 7183 8801
Fax: +44 (0)20 7183 8820
Web page: http://www.blackwellpublishing.com/journal.asp?ref=0266-4658
More information through EDIRC
Postal: Schackstr. 4, 80539 Munich
Phone: +49 (89) 2180-2748
Fax: +49 (89) 39 73 03
Web page: http://www.cesifo-group.de/portal/page/portal/ifoHome/f-about/f2aboutces
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Marie Briere, 2006. "Market Reactions to Central Bank Communication Policies :Reading Interest Rate Options Smiles," Working Papers CEB 38, ULB -- Universite Libre de Bruxelles.
- Vergote, Olivier & Puigvert Gutiérrez, Josep Maria, 2012.
"Interest rate expectations and uncertainty during ECB Governing Council days: Evidence from intraday implied densities of 3-month EURIBOR,"
Journal of Banking & Finance,
Elsevier, vol. 36(10), pages 2804-2823.
- Vergote, Olivier & Puigvert Gutiérrez, Josep Maria, 2011. "Interest rate expectations and uncertainty during ECB governing council days: evidence from intraday implied densities of 3-month Euribor," Working Paper Series 1391, European Central Bank.
- Steven A. Weinberg, 2001. "Interpreting the volatility smile: an examination of the information content of option prices," International Finance Discussion Papers 706, Board of Governors of the Federal Reserve System (U.S.).
- Jose M. Campa & P.H. Kevin Chang & Robert L. Reider, 1997. "Implied Exchange Rate Distributions: Evidence from OTC Option Markets," NBER Working Papers 6179, National Bureau of Economic Research, Inc.
- Dupont, Dominique Y., 2001. "Extracting Risk-Neutral Probability Distributions from Option Prices Using Trading Volume as a Filter," Economics Series 104, Institute for Advanced Studies.
- Cho-Hoi Hui & Chi-Fai Lo & Tsz-Kin Chung, 2008. "Market Expectation of Appreciation of the Renminbi," Working Papers 0803, Hong Kong Monetary Authority.
- Jondeau, Eric & Rockinger, Michael, 1998.
"Reading the Smile: The Message Conveyed by Methods which Infer Risk Neutral Densities,"
CEPR Discussion Papers
2009, C.E.P.R. Discussion Papers.
- Jondeau, Eric & Rockinger, Michael, 2000. "Reading the smile: the message conveyed by methods which infer risk neutral densities," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 885-915, December.
- David S. Bates, 1999. "Financial Markets' Assessment of EMU," NBER Working Papers 6874, National Bureau of Economic Research, Inc.
- José Manuel Campa & P.H. Kevin Chang & James F. Refalo, 1999.
"An Options-Based Analysis of Emerging Market Exchange Rate Expectations: Brazil's Real Plan, 1994-1997,"
99-08, New York University, Leonard N. Stern School of Business, Department of Economics.
- Jose M. Campa & P.H. Kevin Chang & James F. Refalo, 1999. "An Options-Based Analysis of Emerging Market Exchange Rate Expectations: Brazil's Real Plan, 1994-1997," NBER Working Papers 6929, National Bureau of Economic Research, Inc.
- Coutant, Sophie & Jondeau, Eric & Rockinger, Michael, 2001. "Reading PIBOR futures options smiles: The 1997 snap election," Journal of Banking & Finance, Elsevier, vol. 25(11), pages 1957-1987, November.
- Bronka Rzepkowski, 2000. "The Expectations of Hong Kong Dollar Devaluation and Their Determinants," Working Papers 2000-04, CEPII research center.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.