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

Martin Cincibuch () and Matrina Horníková ()
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Matrina Horníková: European Commission (Economic and Financial Affairs), http://ec.europa.eu/economy_finance/index_en.htm

Czech Journal of Economics and Finance (Finance a uver), 2008, vol. 58, issue 05-06, 210-230

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.

Keywords: ambiguity aversion; EMU calculators; EMU enlargement; EMU Poll; forwards; uncertainty (search for similar items in EconPapers)
JEL-codes: E42 E43 G13 G14 (search for similar items in EconPapers)
Date: 2008
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Working Paper: Measuring the Financial Markets' Perception of EMU Enlargement: The Role of Ambiguity Aversion (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:58:y:2008:i:5-6:p:210-230

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