Recovering risk-neutral densities from exchange rate options: Evidence from Lira-Dollar options
AbstractThis paper uses over-the-counter currency options data to investigate market expectations on Turkish Lira-U.S. Dollar exchange rate. We extract option implied density functions to examine the evolution of market sentiment over the possible values of future exchange rates. Uncertainty is well measured by option-implied probabilities. Estimated densities for selected days point out an increase in uncertainty in foreign exchange market during financial turbulence periods. We make inferences about the effectiveness of policy measures and see how the market perception changed throughout the crisis. We uncover the effectiveness of policy measures by observing shrinking densities and confidence bands.
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Bibliographic InfoArticle provided by Bilgesel Yayincilik in its journal İktisat İşletme ve Finans.
Volume (Year): 25 (2010)
Issue (Month): 291 ()
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Web page: http://iif.com.tr
Options; Risk neutral density; Market expectations.;
Find related papers by JEL classification:
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G19 - Financial Economics - - General Financial Markets - - - Other
- F31 - International Economics - - International Finance - - - Foreign Exchange
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