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ijclark
Topic Author
Posts: 4
Joined: April 22nd, 2007, 8:07 pm

### Brexit implied PDFs - paper

Hi all, my colleague Saeed Amen and I have a paper out on SSRN on this very topical issue (you are very welcome to view and download) http://ssrn.com/abstract=2794888Unusually for quant work it has been getting some mainstream media coverage in the FT and Sunday Telegraph, so we would appreciate your thoughts/feedbackhttps://next.ft.com/content/f604ed3f-479e-3de5-9bbb-1204ea81a0e8http://www.telegraph.co.uk/business/2016/06/18 ... ay/Regards, Iain
Last edited by ijclark on June 18th, 2016, 10:00 pm, edited 1 time in total.

Alan
Posts: 9975
Joined: December 19th, 2001, 4:01 am
Location: California
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### Brexit implied PDFs - paper

Interesting paper. Your most recent pdf in Fig. 4, namely the June 10-through-vote-date pdf, shows a lot of structure.There are 3 local peaks near the current value, $1.375, and$1.225. Of course, a peak near the current value makes sense, asthere is significant probability of a Remain vote. But, any thoughts on why the second two local mass peaks occur at those particular values of GBPUSDor why there are local mass peaks at all?

pcaspers
Posts: 695
Joined: June 6th, 2005, 9:49 am

### Brexit implied PDFs - paper

Very interesting. I'd be interested in how you derive a continuous smile from the 5 given points +-25D, +-10D and ATM, I suppose there is some model fitted in between (sorry if I missed this in the paper). And if so, how much detail of the implied density is really coming from the market data and how much from the model. Or put differently if you fit another model or even just use some geometrical interpolation, how different can the resulting implied densities look like although all are matching the market data?

ijclark
Topic Author
Posts: 4
Joined: April 22nd, 2007, 8:07 pm

### Brexit implied PDFs - paper

Hi Alan it's a good question - yes, the specific placement of the local peaks depends on the specifics of the implied vol we use -- a parametric fit, calibrated to the markets -- but what it does show is that there is a considerable amount of (Brexit related) tail probability. I would be reluctant to commit to any point estimates but you can certainly see probability mass clustered in various regions/intervals. I'm by no means surprised to see bimodality (EURCHF early last year had much the same property and look how that turned out) but three peaks does look odd. Whether it's a an artifact of particular smile interpolation or an artifact of an atypical vol surface marked by nervous traders is a good question and one I would like to investigate in a further revision of our work, as more data rolls in.Of course you can't expect every single fx smile model to calibrate nicely to such stressed markets...

ijclark
Topic Author
Posts: 4
Joined: April 22nd, 2007, 8:07 pm

### Brexit implied PDFs - paper

Peter, that's a very salient question (smile model artifact? or market artifact?) and I am certainly going to investigate. I think a *comparative* study of inferred Brexit densities across various FX smile models would be a great idea, but I was asked a bunch of questions about Brexit at a talk I gave at LBS only a few weeks ago and I realised there was specific and timely interest so I wanted to push out a rapid communication - in this case using a polynomial based model, as described in my book. We are both lucky and unlucky to have such interesting markets to consider. Thanks for feedback!

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