Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83310
Authors: 
Crespo Cuaresma, Jesús
Geršl, Adam
Slačík, Tomáš
Year of Publication: 
2010
Series/Report no.: 
IES Working Paper 24/2010
Abstract: 
In 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.
Subjects: 
options
implied volatility
risk-neutral density
exchange rate forecasting
Bayesian model averaging
subprime crisis
emerging markets
JEL: 
C11
C32
C53
F37
G14
G17
Document Type: 
Working Paper
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