Event-related Exchange Rate Forecasts Combining Information from Betting Quotes and Option Prices

Betting quotes provide valuable information on market-implied probabilities for outcomes of events like elections or referendums, which may have an impact on exchange rates. We generate exchange rate forecasts around such events based on a model that combines risk-neutral event probabilities implied from betting quotes with risk-neutral exchange rate densities extracted from currency option prices. Its application to predict exchange rates around the Brexit referendum and the U.S. presidential elections shows that these forecasts – conditional on the respective outcomes – were accurate, and markets were able to separate their views on the likelihood and the impact of these events. ∗Hanke (corresponding author), [email protected], University of Liechtenstein, Institute for Finance, 9490 Vaduz, Liechtenstein; Poulsen, [email protected], University of Copenhagen, Department of Mathematical Sciences, 2100 Copenhagen, Denmark; Weissensteiner, [email protected], Free University of Bozen-Bolzano, School of Economics and Management, 39100 Bozen, Italy. We thank Jennifer Conrad (the editor) and an anonymous referee for their helpful comments, and we thank Johannes Sivén, who provided part of the data and commented on earlier versions of the paper. Poulsen was partially supported by the research center HIPERFIT funded by contract number 10–092299 from the Danish Strategic Research Council.