IDEAS home Printed from https://ideas.repec.org/a/ecj/econjl/v108y1998i449p1046-66.html
   My bibliography  Save this article

ERM Realignment Risk and Its Economic Determinants as Reflected in Cross-Rate Options

Author

Listed:
  • Campa, Jose M
  • Chang, P H Kevin

Abstract

This paper uses data on over-the-counter options between the mark and the pound, lira, French franc, and peseta to investigate the credibility of exchange rate target zones within the exchange rate mechanism. The authors compare empirical implications for the relation between option prices and the spot's position within the band for three classes of target zone models: those with full credibility, those with exogenous realignment risk, and those with endogenous realignment risk. Empirically, implied volatility from these options attains a maximum near the edges of an exchange rate band rather than its center, even three to six months prior to realignment.

Suggested Citation

  • Campa, Jose M & Chang, P H Kevin, 1998. "ERM Realignment Risk and Its Economic Determinants as Reflected in Cross-Rate Options," Economic Journal, Royal Economic Society, vol. 108(449), pages 1046-1066, July.
    • Handle: RePEc:ecj:econjl:v:108:y:1998:i:449:p:1046-66
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mundaca, Gabriela, 2003. "A Drift of the "Drift Adjustment Method"," Memorandum 16/2002, Oslo University, Department of Economics.
    2. Pierdzioch, Christian, 2000. "Noise Traders? Trigger Rates, FX Options, and Smiles," Kiel Working Papers 970, Kiel Institute for the World Economy (IfW Kiel).
    3. Driffill, John & Sola, Martin, 2006. "Target zones for exchange rates and policy changes," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 912-931, October.
    4. Campa, Jose M. & Chang, P. H. Kevin & Refalo, James F., 2002. "An options-based analysis of emerging market exchange rate expectations: Brazil's Real Plan, 1994-1999," Journal of Development Economics, Elsevier, vol. 69(1), pages 227-253, October.
    5. Darvas, Zsolt, 1999. "Az árfolyamsávok empirikus modelljei és a devizaárfolyam sávon belüli előrejelezhetetlensége [Empirical models of exchange rate target zones]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 507-529.
    6. Margarida Abreu, 2003. "Contagion Phenomena in Financial Crises: Evidence from the Portuguese and Spanish Exchange Rate Crises in the Early Nineties," Working Papers Department of Economics 2003/05, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    7. Bernardo Guimaraes, 2008. "Vulnerability of Currency Pegs: Evidence from Brazil," CEP Discussion Papers dp0871, Centre for Economic Performance, LSE.
    8. Markus Hertrich, 2022. "Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc," Review of International Economics, Wiley Blackwell, vol. 30(2), pages 450-489, May.
    9. Inci, Ahmet Can, 2005. "ERM effects on currency spot and futures markets," Global Finance Journal, Elsevier, vol. 16(2), pages 145-163, December.
    10. Driessen, Joost & Perotti, Enrico, 2011. "Confidence building on Euro convergence: Evidence from currency options," Journal of International Money and Finance, Elsevier, vol. 30(3), pages 474-491, April.
    11. Perotti, Enrico & Driessen, Joost, 2004. "Confidence Building on Euro Conversion: Theory and Evidence from Currency Options," CEPR Discussion Papers 4180, C.E.P.R. Discussion Papers.
    12. Alexandra Janssen & Rahel Studer, 2014. "The Swiss franc's honeymoon," ECON - Working Papers 170, Department of Economics - University of Zurich, revised Jan 2017.
    13. Christoffersen, Peter & Jacobs, Kris & Chang, Bo Young, 2013. "Forecasting with Option-Implied Information," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 581-656, Elsevier.
    14. Bernardo Guimaraes, 2005. "Market Expectations and Currency Crises: Theory and Empirics," 2005 Meeting Papers 174, Society for Economic Dynamics.
    15. Rzepkowski, Bronka, 2003. "The devaluation expectations in Hong Kong and their determinants," Journal of the Japanese and International Economies, Elsevier, vol. 17(2), pages 174-191, June.
    16. 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," Working Papers 99-08, New York University, Leonard N. Stern School of Business, Department of Economics.
    17. Martin Mandler, 2002. "Extracting Market Expectations from Option Prices: Two Case Studies in Market Perceptions of the ECB's Monetary Policy 1999/2000," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(II), pages 165-189, June.
    18. Guimaraes, Bernardo, 2007. "Currency Crisis Triggers: Sunspots or Thresholds?," CEPR Discussion Papers 6487, C.E.P.R. Discussion Papers.
    19. Rangvid, Jesper & Sorensen, Carsten, 2001. "Determinants of the implied shadow exchange rates from a target zone," European Economic Review, Elsevier, vol. 45(9), pages 1665-1696, October.
    20. Ryan Ratcliff, 2010. "Predicting nominal exchange rate movements using skewness information from options prices," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 75-92.
    21. Margarida Abreu, 2003. "Contagion Phenomena in Financial Crises: Evidence from the Portuguese and Spanish Exchange Rate Crises in the Early 1990s," International Finance, Wiley Blackwell, vol. 6(2), pages 201-225, July.
    22. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecj:econjl:v:108:y:1998:i:449:p:1046-66. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    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 (email available below). General contact details of provider: https://edirc.repec.org/data/resssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.