Currency crisis prediction using ADR market data: An options-based approach

Dominik Maltritz and Stefan Eichler

International Journal of Forecasting, 2010, vol. 26, issue 4, 858-884

Abstract: During capital control episodes, large price deviations between American Depositary Receipts (ADR) and their underlying stocks signal that a currency crisis is about to occur. We interpret this price spread as the price of a call option. Using option pricing theory we derive detailed information about both the probability of a currency crisis and the expected magnitude of devaluation. Analyzing daily ADR market data preceding the Venezuelan crisis (1996), our approach predicts crisis probabilities of almost 100% and forecasts the exchange rate after floating quite accurately. During the Argentine crisis (2002), the estimated exchange rates are similar to the actual ones.

Keywords: Exchange; rates; Finance; Financial; markets; Probability; forecasting; Stock; market; data (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:26:y::i:4:p:858-884

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