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Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Option prices and risk-neutral densities for currency cross-rates
AU - Taylor, S J
AU - Wang, Y
PY - 2010
Y1 - 2010
N2 - The theoretical relationship between the risk-neutral density (RND) of the euro/ pound cross rate and the bivariate RND of the dollar/euro and the dollar/pound rates is derived; the required bivariate RND is defined by the dollar-rate marginal RNDs and a copula function. The cross-rate RND can be used by banks, international businesses, and central bankers to assess market expectations, to measure risks, and to value options, without relying on over-the-counter markets, which may be either non-existent or illiquid. Empirical comparisons are made between cross-rate RNDs estimated from several data sets. Five one-parameter copula functions are evaluated and it is found that the Gaussian copula is the only one-parameter copula function that is ranked highly in all of the comparisons we have made
AB - The theoretical relationship between the risk-neutral density (RND) of the euro/ pound cross rate and the bivariate RND of the dollar/euro and the dollar/pound rates is derived; the required bivariate RND is defined by the dollar-rate marginal RNDs and a copula function. The cross-rate RND can be used by banks, international businesses, and central bankers to assess market expectations, to measure risks, and to value options, without relying on over-the-counter markets, which may be either non-existent or illiquid. Empirical comparisons are made between cross-rate RNDs estimated from several data sets. Five one-parameter copula functions are evaluated and it is found that the Gaussian copula is the only one-parameter copula function that is ranked highly in all of the comparisons we have made
U2 - 10.1002/fut.20420
DO - 10.1002/fut.20420
M3 - Journal article
VL - 30
SP - 324
EP - 360
JO - Journal of Futures Markets
JF - Journal of Futures Markets
SN - 0270-7314
ER -