The economic-political instability of a country, which is tied to its credit risk, often leads to sharp depreciation and heightened volatility in its currency. This paper shows that not only the creditworthiness of the euro-area countries with weaker fiscal positions but also that of the member countries with more sound fiscal positions are important determinants of the deep out-of-the-money euro put option prices, which embedded information on the euro crash risk during the sovereign debt crisis of 2009–2010. We also find evidence of information flow from the sovereign credit default swap market to the currency option market during the crisis.

The price disparity between the A- and H-share markets for dual-listed firms in China is one of the most intriguing puzzles in the Mainland and Hong Kong financial markets. In this paper, we revisit this price disparity puzzle using the channel of parameter uncertainty. In the presence of information asymmetry and market segmentation, investors have different views on a firm’s asset volatility, and hence different valuations of the same reference firm. We estimate a structural model for equity pricing using a Bayesian approach, in which the uncertainty of investor model parameters is represented by the posterior standard deviation of the firm’s asset volatility. Our regression analysis shows that in addition to other market-based and macro factors, parameter uncertainty explains variations in price disparity.

This paper proposes an analytic method to estimate the option-implied correlation embedded in options on the iTraxx Europe CDS indexes. The option-implied correlation is suggested as a measure of the spillover effect of default risk between the financial and corporate sectors in Europe. In particular, the correlation between the iTraxx Financials and Non-Financials sub-indexes is estimated from options on the iTraxx Main Index, which is considered as a basket option with the two sub-indexes being its underlyings. The abrupt changes of the realized correlation anticipated information of the corresponding option prices. The sovereign default risk, funding liquidity risk, level of risk aversion, and equity market performance are identified to be significant determinants of the option-implied correlation, implying inter-dependence amongst various markets during the European debt crisis.