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

  • Maltritz, Dominik
  • Eichler, Stefan

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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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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