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Could Markets Have Helped Predict the Puzzling Exchange Rate Path in CESEE Countries during the Current Crisis?

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  • Jesús Crespo Cuaresma

    ()
    (Vienna University of Economics and Business, Institute for Fiscal and Monetary Policy)

  • Tomáš Slacík

    ()
    (Oesterreichische Nationalbank, Foreign Research Division)

Abstract

In the present paper we examine whether financial markets could have helped predict exchange rates in selected Central, Eastern and Southeastern European (CESEE) economies, namely the Czech Republic, Hungary and Poland, during the current financial crisis. To this end, we derive risk-neutral densities from the implied volatilities of FX options, which approximate market expectations about exchange rate developments. Based on these risk-neutral density estimates, we then assess the out-of-sample predictive power of indicators. The forecasting results suggest that models based on FX options are inferior to the random walk in terms of the forecasting error, confirming a stylized fact about the short-term forecasting of exchange rates. Yet, we also find that, for the Czech Republic and Poland, risk-neutral densities contain useful information on the direction of change of the exchange rate.

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File URL: http://www.oenb.at/dms/oenb/Publikationen/Volkswirtschaft/Focus-on-European-Economic-Integration/2010/Focus-on-European-Economic-Integration-Q1-10/chapters/feei_2010_q1_studies_crespo_tcm16-186370.pdf
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Bibliographic Info

Article provided by Oesterreichische Nationalbank (Austrian Central Bank) in its journal Focus on European Economic Integration.

Volume (Year): (2010)
Issue (Month): 1 ()
Pages: 32-48

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Handle: RePEc:onb:oenbfi:y:2010:i:1:b:2

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Related research

Keywords: Options; implied volatility; risk-neutral density; exchange rate forecasting; Bayesian model averaging; subprime crisis; emerging markets;

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