Arbitrage-based tests of target-zone credibility: evidence from ERM cross-rate options

Article Abstract:

Two arbitrage-based tests of target-zone credibility utilizing data from the European Exchange-Rate Mechanism cross-rate options are developed. The credibility of the pound-mark and mark-lira target zones that crashed in Sep. 1992 and the ongoing mark-French franc target zone is examined by studying daily option prices from Sep. 1991 to Aug. 1994. The tests are based on limitations that are applicable to all option prices within a credible target zone and are free from specification error and estimation error.

Prices and rates, Options (Finance), Arbitrage

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Stock price volatility: tests based on the geometric random walk

Article Abstract:

A model-free bounds test, a model-free orthogonality test, a model-based orthogonality test and two model-based bounds tests were conducted to determine the volatility of the ratio of stock price to dividends. The results indicated that the model-free bounds test was indecisive. The model-based bounds tests also were indecisive, but they provided better point estimates of volatility. The model-based orthogonality test was better than the model-free version in estimating volatility.

Models, Stock price forecasting, Mathematical analysis

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A statistical identity linking folded and censored distributions

Article Abstract:

Expected future values of Gaussian stochastic processes bounded by reflecting barriers is developed into a model. Models with forward looking agents need these expected future values. This method is applied to an exchange rate target zone where the formal analysis takes the distributional approach. The relationship of the first moments of folded and censored distributions is shown by the analysis. The analysis is extended from discrete-time to continuous-time of Brownian motion.

Stochastic processes, Gaussian processes

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