Global Financial Crisis and the Puzzling Exchange Rate Path in CEE Countries
AbstractIn the present paper we examine whether financial markets could have helped predict exchange rates in three selected Central and Eastern European (CEE) economies of the EU, 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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Bibliographic InfoPaper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2010/24.
Length: 19 pages
Date of creation: Sep 2010
Date of revision: Sep 2010
Options; implied volatility; risk-neutral density; exchange rate forecasting; Bayesian model averaging; subprime crisis; emerging markets;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-09 (All new papers)
- NEP-FOR-2010-10-09 (Forecasting)
- NEP-IFN-2010-10-09 (International Finance)
- NEP-TRA-2010-10-09 (Transition Economics)
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