Could Markets Have Helped Predict the Puzzling Exchange Rate Path in CESEE Countries during the Current Crisis?

Jesus Crespo Cuaresma and Tomáš Slacík ()
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Tomáš Slacík: Oesterreichische Nationalbank, Foreign Research Division
Authors registered in the RePEc Author Service: Adam Gersl

Focus on European Economic Integration, 2010, issue 1, 32-48

Abstract: In the present paper we examine whether financial markets could have helped predict exchange rates in selected Central, Eastern and Southeastern European (CESEE) economies, 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)
Date: 2010
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Citations: View citations in EconPapers (2)

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