The discontinuation of the EUR/CHF minimum exchange rate: information from option-implied break probabilities

Michael Funke, Loermann Julius () and Richhild Moessner
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Loermann Julius: Department of Economics, Hamburg University, Hamburg, Germany

Studies in Nonlinear Dynamics & Econometrics, 2020, vol. 25, issue 3, 63-79

Abstract: We derive risk-neutral probability densities for future euro/Swiss franc exchange rates as implied by option prices. We find that the credibility of the Swiss franc floor decreased somewhat as the spot exchange rate approached the lower bound of 1.20 CHF per euro. We also compare the forecasting performance of a random walk benchmark model with an error-correction model (ECM) augmented with option-implied break probabilities of breaching the currency floor. We find some evidence that the augmented ECM has an informational advantage over the random walk when using one-month break probabilities. But we find that one-month option-implied densities cannot predict the entire range of exchange rate realizations.

Keywords: forecasting; options; risk-neutral probability densities; Swiss franc (search for similar items in EconPapers)
JEL-codes: C53 F31 F37 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1515/snde-2019-0078

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