Title: Recovery theorem and the risk aversion: evidence from the Czech Republic

Authors: Martin Časta

Addresses: Czech National Bank, Prague University of Economics and Business, Prague, 169 00, Czech Republic

Abstract: The main goal of this study is to obtain expectations regarding the future development of the exchange rate using derived option probabilities and based on them to calculate the perception of risk by investors. More specifically, this study deals with the application of the Ross recovery theorem in the FOREX market using the CZK/EUR exchange rate. From a theoretical point of view, I offer an expression of the Ross recovery theorem using different Numeraire and I also apply a novel approach to the calculation of the implied risk premium. The results show that both subjective and risk-neutral densities are not unbiased probability estimates of a future exchange rate. However, the results show a significant increase in the implied risk aversion during the Covid19 pandemic.

Keywords: risk aversion; Ross recovery theorem; risk-neutral densities; subjective densities; risk premium; Covid19; FX options; Czech Republic; Czech Koruna.

DOI: 10.1504/IJMEF.2024.144126

International Journal of Monetary Economics and Finance, 2024 Vol.17 No.5, pp.413 - 434

Received: 28 Aug 2021
Accepted: 28 Mar 2022
Published online: 28 Jan 2025 *

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