Peso Problem

Peso Problem

The phenomenon in which the market prices in (or takes into account when determining the price) the small possibility of a large change. The term especially refers to exchange rates of pegged currencies, which may be slightly different from the official rates to account for the probability that currencies will drop or change their pegs.
References in periodicals archive ?
It's a 34-billion peso problem to be shouldered by the Filipino people."
This finding is consistent with the view that the average payoff to the unhedged carry trade reflects a peso problem. An obvious question is: what is the nature of the peso event for which agents are being compensated?
Rebelo, "Do Peso Problems Explain the Returns to the Carry Trade?" NBER Working Paper No.
There are three econometric challenges in testing the uncovered interest parity for emerging markets: the existence of relatively frequent structural breaks; a peso problem; and a simultaneity bias due to the central bank's interventions.
Financial markets refer to this phenomenon--the incorporation of a premium for the small probability of a big, discrete price change--as the peso problem, after a similar event during the early 1970s in the market for Mexican pesos.
"Understanding Asset Values: Stock Prices, Exchange Rates, and the 'Peso Problem,'" Federal Reserve Bank of Philadelphia, Business Review, (September/October): 3-13.
This causes the very well known "peso problem" in the estimation.
When a peso problem is present, the sample moments calculated from the available data do not coincide with the population moments that agents actually use when making their decisions."
"'Peso Problem' Explanations for Term Structure Anomalies," Stanford University Graduate School of Business Research Paper 1145, July 1997.
I explain how "peso problems" associated with "inflation scares" in the bond market may help to account for a serious empirical failure of the expectations theory of the term structure.
Some say it's the fall-out from the Mexican peso problem. Others, that it's because we owe a lot of money to foreign bond holders or because the federal deficit is still not under control.