Numeraire Dependence in Risk-Neutral Probabilities of Event Outcomes
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- OAversionPoulsen
Accepted author manuscript, 382 KB, PDF document
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.
Original language | English |
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Journal | Journal of Derivatives |
Volume | 26 |
Issue number | 4 |
Pages (from-to) | 128-143 |
ISSN | 1074-1240 |
DOIs | |
Publication status | Published - 2019 |
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