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Currency crisis prediction using ADR market data: An options-based approach

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  • Maltritz, Dominik
  • Eichler, Stefan

Abstract

During capital control episodes, large price deviations between American Depositary Receipts (ADR) and their underlying stocks signal that a currency crisis is about to occur. We interpret this price spread as the price of a call option. Using option pricing theory we derive detailed information about both the probability of a currency crisis and the expected magnitude of devaluation. Analyzing daily ADR market data preceding the Venezuelan crisis (1996), our approach predicts crisis probabilities of almost 100% and forecasts the exchange rate after floating quite accurately. During the Argentine crisis (2002), the estimated exchange rates are similar to the actual ones.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 26 (2010)
Issue (Month): 4 (October)
Pages: 858-884

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Handle: RePEc:eee:intfor:v:26:y::i:4:p:858-884

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Web page: http://www.elsevier.com/locate/ijforecast

Related research

Keywords: Exchange rates Finance Financial markets Probability forecasting Stock market data;

References

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Cited by:
  1. Eichler, Stefan & Karmann, Alexander & Maltritz, Dominik, 2011. "The term structure of banking crisis risk in the United States: A market data based compound option approach," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 876-885, April.

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