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Measuring the Financial Markets’ Perception of EMU Enlargement: The Role of Ambiguity Aversion

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Abstract

Market views on EMU enlargement are measured by a new indicator based on the short-term dynamics of forward spreads. Conceptually, this indicator stems from the notion of ambiguity-averse agents in the sense of Knight. Specifically, we attempt to operationalize the incomplete preferences framework, which may allow for multiple equilibria supported by one set of fundamentals. This equilibrium indeterminacy may offer a way to reconcile short-term fluctuations of market prices with a relatively stable underlying economic environment and expectations. The method was applied to data from Central European countries, including the Czech Republic, Hungary, Poland, and Slovakia. Comparing our results with financial market opinion surveys, the results of the proposed method seems to be in accordance with market expectations.

Suggested Citation

  • Martin Cincibuch & Matrina Horníková, 2008. "Measuring the Financial Markets’ Perception of EMU Enlargement: The Role of Ambiguity Aversion," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(05-06), pages 210-230, August.
    • Handle: RePEc:fau:fauart:v:58:y:2008:i:5-6:p:210-230
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    More about this item

    Keywords

    ambiguity aversion; EMU calculators; EMU enlargement; EMU Poll; forwards; uncertainty;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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