Numeraire Dependence in Risk-Neutral Probabilities of Event Outcomes

Michael Hanke; Rolf Poulsen; Alex Weissensteiner

doi:10.3905/jod.2019.26.4.128

Numeraire Dependence in Risk-Neutral Probabilities of Event Outcomes

Michael Hanke, Rolf Poulsen, Alex Weissensteiner

Institut for Matematiske Fag

Abstract

For most non-financial events, risk-neutral outcome probabilities are identical across numeraire currencies. Some events, however, such as elections or referendums, may have an impact on exchange rates. This implies numeraire dependence in risk-neutral outcome probabilities, which leads to different state prices for affected currency pairs. If betting odds available to punters do not reflect these differences, this may give rise to (approximate) arbitrage opportunities. Despite the sizable risk this creates, odds quoted by bookmakers seem to ignore this effect.

Originalsprog	Engelsk
Tidsskrift	Journal of Derivatives
Vol/bind	26
Udgave nummer	4
Sider (fra-til)	128-143
ISSN	1074-1240
DOI	https://doi.org/10.3905/jod.2019.26.4.128
Status	Udgivet - jun. 2019

Adgang til dokumentet

10.3905/jod.2019.26.4.128

OAversionPoulsenAccepteret manuskript, 382 KB

Citationsformater

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title = "Numeraire Dependence in Risk-Neutral Probabilities of Event Outcomes",

abstract = "For most non-financial events, risk-neutral outcome probabilities are identical across numeraire currencies. Some events, however, such as elections or referendums, may have an impact on exchange rates. This implies numeraire dependence in risk-neutral outcome probabilities, which leads to different state prices for affected currency pairs. If betting odds available to punters do not reflect these differences, this may give rise to (approximate) arbitrage opportunities. Despite the sizable risk this creates, odds quoted by bookmakers seem to ignore this effect.",

author = "Michael Hanke and Rolf Poulsen and Alex Weissensteiner",

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AU - Weissensteiner, Alex

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N2 - For most non-financial events, risk-neutral outcome probabilities are identical across numeraire currencies. Some events, however, such as elections or referendums, may have an impact on exchange rates. This implies numeraire dependence in risk-neutral outcome probabilities, which leads to different state prices for affected currency pairs. If betting odds available to punters do not reflect these differences, this may give rise to (approximate) arbitrage opportunities. Despite the sizable risk this creates, odds quoted by bookmakers seem to ignore this effect.

AB - For most non-financial events, risk-neutral outcome probabilities are identical across numeraire currencies. Some events, however, such as elections or referendums, may have an impact on exchange rates. This implies numeraire dependence in risk-neutral outcome probabilities, which leads to different state prices for affected currency pairs. If betting odds available to punters do not reflect these differences, this may give rise to (approximate) arbitrage opportunities. Despite the sizable risk this creates, odds quoted by bookmakers seem to ignore this effect.

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DO - 10.3905/jod.2019.26.4.128

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