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The Empirical Performance of Option Based Densities of Foreign Exchange Ben R. Craig

Joachim G. Keller

Discussion paper 07/02

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Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Postfach 10 06 02, 60006 Frankfurt am Main

Tel +49 69 95 66-1

Telex within Germany 4 1 227, telex from abroad 4 14 431, fax +49 69 5 60 10 71 Please address all orders in writing to: Deutsche Bundesbank,

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Probability Structure for one Node

Pentionomial-Tree for 1/6<α<2/3

Xi+2∆h,t+∆t with probabil ity p2=(1/2) α²-(1/12)α Xi+∆h,t+∆t with probabil ity p1=-2α²+(4/3) α

Xi,t Xi,t+ ∆t with probabil ity p₃=3α²-(5/2)α+1 Xi-∆h,t+∆t with probabil ity p4=p1

Xi-2∆h,t+∆t with probabil ity p₅=p₂

Trinomial-Tree for 0<α<1/6 (low values of σ²(X,τ, ))

Xi+∆h,t+∆t with probabil ity p₁= α/2

X_i,tXi,t+∆t with probabil ity p₂=1- α Xi-∆h,t+∆t with probabil ity p1= α/2

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(16)

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The following papers have been published since 2000:

February 2000 How Safe Was the „Safe Haven“?

Financial Market Liquidity during

the 1998 Turbulences Christian Upper May 2000 The determinants of the euro-dollar

exchange rate – Synthetic fundamentals Jörg Clostermann and a non-existing currency Bernd Schnatz July 2000 Concepts to Calculate Equilibrium

Exchange Rates: An Overview Ronald MacDonald August 2000 Core inflation rates: A comparison of

methods based on west German data Bettina Landau September 2000 Exploring the Role of Uncertainty

for Corporate Investment Decisions

in Germany Ulf von Kalckreuth

November 2000 Central Bank Accountability and

Transparency: Theory and Some Sylvester C.W. Eijffinger

Evidence Marco M. Hoeberichts

November 2000 Welfare Effects of Public Stephen Morris

Information Hyung Song Shin

November 2000 Monetary Policy Transparency, Public Commentary, and Market Perceptions

about Monetary Policy in Canada Pierre L. Siklos

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November 2000 Expectations and the Stability Problem George W. Evans for Optimal Monetary Policies Seppo Honkapohja January 2001 Unemployment, Factor Substitution, Leo Kaas

and Capital Formation Leopold von Thadden January 2001 Should the Individual Voting Records Hans Gersbach

of Central Banks be Published? Volker Hahn January 2001 Voting Transparency and Conflicting Hans Gersbach

Interests in Central Bank Councils Volker Hahn January 2001 Optimal Degrees of Transparency in

Monetary Policymaking Henrik Jensen January 2001 Are Contemporary Central Banks

Transparent about Economic Models and Objectives and What Difference

Does it Make? Alex Cukierman

February 2001 What can we learn about monetary policy Andrew Clare transparency from financial market data? Roger Courtenay March 2001 Budgetary Policy and Unemployment Leo Kaas

Dynamics Leopold von Thadden

March 2001 Investment Behaviour of German Equity Fund Managers – An Exploratory Analysis

of Survey Data Torsten Arnswald

April 2001 The information content of survey data on expected price developments for

monetary policy Christina Gerberding

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July 2001 Interbank lending and monetary policy Michael Ehrmann Transmission: evidence for Germany Andreas Worms September 2001 Precommitment, Transparency and

Montetary Policy Petra Geraats

September 2001 Ein disaggregierter Ansatz zur Berechnung konjunkturbereinigter Budgetsalden für

Deutschland: Methoden und Ergebnisse * Matthias Mohr September 2001 Long-Run Links Among Money, Prices, Helmut Herwartz

and Output: World-Wide Evidence Hans-Eggert Reimers November 2001 Currency Portfolios and Currency Ben Craig

Exchange in a Search Economy Christopher J. Waller December 2001 The Financial System in the Thomas Reininger

Czech Republic, Hungary and Poland Franz Schardax after a Decade of Transition Martin Summer December 2001 Monetary policy effects on

bank loans in Germany:

A panel-econometric analysis Andreas Worms

December 2001 Financial systems and the role of banks M. Ehrmann, L. Gambacorta in monetary policy transmission J. Martinez-Pages

in the euro area P. Sevestre, A. Worms

December 2001 Monetary Transmission in Germany:

New Perspectives on Financial Constraints

and Investment Spending Ulf von Kalckreuth

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January 2002 Rent indices for housing in West Johannes Hoffmann

Germany 1985 to 1998 Claudia Kurz

January 2002 Short-Term Capital, Economic Transform- Claudia M. Buch ation, and EU Accession Lusine Lusinyan January 2002 Fiscal Foundation of Convergence

to European Union in László Halpern

Pre-Accession Transition Countries Judit Neményi January 2002 Testing for Competition Among

German Banks Hannah S. Hempell

January 2002 The stable long-run CAPM and

the cross-section of expected returns Jeong-Ryeol Kim February 2002 Pitfalls in the European Enlargement

Process – Financial Instability and

Real Divergence Helmut Wagner

February 2002 The Empirical Performance of Option Ben R. Craig Based Densities of Foreign Exchange Joachim G. Keller

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Visiting researcher at the Deutsche Bundesbank

The Deutsche Bundesbank in Frankfurt is looking for a visiting researcher. Visitors should prepare a research project during their stay at the Bundesbank. Candidates must hold a Ph D and be engaged in the field of either macroeconomics and monetary economics, financial markets or international economics. Proposed research projects should be from these fields. The visiting term will be from 3 to 6 months. Salary is commensurate with experience.

Applicants are requested to send a CV, copies of recent papers, letters of reference and a proposal for a research project to:

Deutsche Bundesbank Personalabteilung Wilhelm-Epstein-Str. 14 D - 60431 Frankfurt GERMANY

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