Arbitrage-Based Tests of Target Zone Credibility: Evidence from ERM Cross-Rate Options
AbstractThis paper introduces two arbitrage-based tests of target-zone credibility using a new data source, exchange-rate mechanism cross-rate options. Using daily option prices from September 1991 to August 1994, the authors assess the credibility of the pound-mark and mark-lira target zones that collapsed in September 1992 and the ongoing mark-French franc target zone. These tests are based on restrictions that must apply to all option prices within a credible target zone and are free from specification error and estimation error. The authors also identify a minimum 'intensity of realignment,' an expression indicating the probability-weighted average realignment size. Copyright 1996 by American Economic Association.
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Bibliographic InfoPaper provided by Columbia - Graduate School of Business in its series Papers with number 95-25.
Length: 37 pages
Date of creation: 1995
Date of revision:
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Postal: U.S.A.; COLUMBIA UNIVERSITY, GRADUATE SCHOOL OF BUSINESS, PAINE WEBBER , New York, NY 10027 U.S.A
Phone: (212) 854-5553
Web page: http://www.columbia.edu/cu/business/
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EXCHANGE RATE; FORECASTS; ECONOMETRICS; CURRENCIES; INTERNATIONAL FINANCE;
Other versions of this item:
- Campa, Jose Manuel & Chang, P H Kevin, 1996. "Arbitrage-Based Tests of Target-Zone Credibility: Evidence from ERM Cross-Rate Options," American Economic Review, American Economic Association, vol. 86(4), pages 726-40, September.
- F30 - International Economics - - International Finance - - - General
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F39 - International Economics - - International Finance - - - Other
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