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

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  • Hanke, Michael
  • Poulsen, Rolf
  • Weissensteiner, Alex

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.

Suggested Citation

  • Hanke, Michael & Poulsen, Rolf & Weissensteiner, Alex, 2018. "Event-Related Exchange-Rate Forecasts Combining Information from Betting Quotes and Option Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(6), pages 2663-2683, December.
    • Handle: RePEc:cup:jfinqa:v:53:y:2018:i:06:p:2663-2683_00
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    Citations

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    Cited by:

    1. Dave Cliff, 2021. "BBE: Simulating the Microstructural Dynamics of an In-Play Betting Exchange via Agent-Based Modelling," Papers 2105.08310, arXiv.org.
    2. Hanke, Michael & Stöckl, Sebastian & Weissensteiner, Alex, 2020. "Political event portfolios," Journal of Banking & Finance, Elsevier, vol. 118(C).
    3. Matthijs Breugem & Raffaele Corvino & Roberto Marfe & Lorenzo Schonleber, 2024. "Pandemic Tail Risk," Carlo Alberto Notebooks 714 JEL Classification: C, Collegio Carlo Alberto.
    4. Petteri Piiroinen & Lassi Roininen & Martin Simon, 2019. "Brexit Risk Implied by the SABR Martingale Defect in the EUR-GBP Smile," Papers 1912.05773, arXiv.org, revised Mar 2020.
    5. Kostakis, Alexandros & Mu, Liangyi & Otsubo, Yoichi, 2023. "Detecting political event risk in the option market," Journal of Banking & Finance, Elsevier, vol. 146(C).
    6. Paolo Manasse & Graziano Moramarco & Giulio Trigilia, 2024. "Exchange rates and political uncertainty: the Brexit case," Economica, London School of Economics and Political Science, vol. 91(362), pages 621-652, April.
    7. Stöckl, Sebastian & Rode, Martin, 2021. "The price of populism: Financial market outcomes of populist electoral success," Journal of Economic Behavior & Organization, Elsevier, vol. 189(C), pages 51-83.
    8. Jaqueline Terra Moura Marins, 2024. "Predictability of Exchange Rate Density Forecasts for Emerging Economies in the Short Run," Working Papers Series 588, Central Bank of Brazil, Research Department.

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