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The discontinuation of the EUR/CHF minimum exchange rate: information from option-implied break probabilities

Author

Listed:
  • Funke Michael
  • Loermann Julius

    (Department of Economics, Hamburg University, Hamburg, Germany)

  • Moessner Richhild

    (Bank for International Settlements, Basel, Switzerland)

Abstract

We derive risk-neutral probability densities for future euro/Swiss franc exchange rates as implied by option prices. We find that the credibility of the Swiss franc floor decreased somewhat as the spot exchange rate approached the lower bound of 1.20 CHF per euro. We also compare the forecasting performance of a random walk benchmark model with an error-correction model (ECM) augmented with option-implied break probabilities of breaching the currency floor. We find some evidence that the augmented ECM has an informational advantage over the random walk when using one-month break probabilities. But we find that one-month option-implied densities cannot predict the entire range of exchange rate realizations.

Suggested Citation

  • Funke Michael & Loermann Julius & Moessner Richhild, 2020. "The discontinuation of the EUR/CHF minimum exchange rate: information from option-implied break probabilities," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 25(3), pages 63-79, June.
    • Handle: RePEc:bpj:sndecm:v:25:y:2020:i:3:p:63-79:n:2
    DOI: 10.1515/snde-2019-0078
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    More about this item

    Keywords

    forecasting; options; risk-neutral probability densities; Swiss franc; C53; F31; F37;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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