Currency crisis prediction using ADR market data: An options-based approach
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.
Year of publication: |
2010
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---|---|
Authors: | Maltritz, Dominik ; Eichler, Stefan |
Published in: |
International Journal of Forecasting. - Elsevier, ISSN 0169-2070. - Vol. 26.2010, 4, p. 858-884
|
Publisher: |
Elsevier |
Keywords: | Exchange rates Finance Financial markets Probability forecasting Stock market data |
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