Recovering Risk-Neutral Densities from Exchange Rate Options: Evidence in Turkey

Recovering Risk-Neutral Densities from Exchange Rate Options: Evidence in Turkey

Title : Recovering Risk-Neutral Densities from Exchange Rate Options: Evidence in Turkey
Number : 10/03
Author(s) : Halil İbrahim Aydın, Ahmet Değerli, Pınar Özlü
Language : English
Date : March 2010
Abstract : This paper uses over-the-counter currency options data to investigate market expectations on Turkish Lira-U.S. Dollar exchange rate. We extract option implied density functions to examine the evolution of market sentiment over the possible values of future exhange rates. Uncertainty is well measured by option-implied probabilities. Estimated densities for selected days point out an increase in uncertainty in foreign exchange market during financial turbulence periods. We make inferences about the effectiveness of policy measures and see how the market perception changed throughout the crisis. We uncover the effectiveness of policy measures by observing shrinking densities and confidence bands.
Keywords : ROptions, Risk neutral density, Market expectations
JEL Codes : G13, G19, F31

Recovering Risk-Neutral Densities from Exchange Rate Options: Evidence in Turkey
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