Exchange rate modelling Related to Brexit and GBPUSD

Specialeforsvar ved Niklas Hedegaard

Titel: Exchange rate modelling Related to Brexit and GBPUSD


Abstract: Modelling exchange rates around major events is a well-know problem in the financial world. We present here two models to estimate exchange rates, both using data from the betting market and the option market. The models are mixtures of two and three log-normal return density functions. The mixing approach estimates a mixed density as a weighted sum of the component densities. The betting market provides betting qoutes which we compute into risk-neutral probabilities to use as weights, while we use the option data to estimate the parameters of the densities. We apply the models to the British EU-exit events and the GBPUSD exchange rate. Brexit is a hot issue these days in Europa, and there is heavy discussions of what will be the new deal between the United Kingdom and the European Union. Using the mixture models we estimate expected GBPUSD exchange rates conditional on each possible outcome of these Brexit events.



Vejleder: Rolf Poulsen
Censor:   Elisa Nicolato, Aarhus Universitet