Global Financial Crisis and the Puzzling Exchange Rate Path in CEE Countries

Jesus Crespo Cuaresma, Adam Gersl and Tomáš Slačík ()
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Tomáš Slačík: European Central Bank, http://www.ecb.int/

No 2010/24, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

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.

Keywords: Options; implied volatility; risk-neutral density; exchange rate forecasting; Bayesian model averaging; subprime crisis; emerging markets (search for similar items in EconPapers)
JEL-codes: C11 C32 C53 F37 G14 G17 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2010-09, Revised 2010-09
New Economics Papers: this item is included in nep-for, nep-ifn and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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