Are Standard Deviations Implied in Currency Option Prices Good Predictors of Future Exchange Rate Volatility? PDF Download
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Author: Mariusz Tamborski
Publisher:
ISBN:
Category : Foreign exchange
Languages : en
Pages : 40
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Book Description
Author: Mariusz Tamborski
Publisher:
ISBN:
Category : Foreign exchange
Languages : en
Pages : 40
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Book Description
Author: Zhaohui Chen
Publisher: World Scientific
ISBN: 9814499161
Category : Business & Economics
Languages : en
Pages : 218
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Book Description
This volume is a collection of classical and recent empirical studies of currency options and their implications for issues of exchange rate economics, such as exchange rate risk premium, volatility, market expectations, and credibility of exchange rate regimes. It contains applications on how to extract useful information from option market data for financial forecasting policy purposes. The subjects are discussed in a self-contained, user-friendly format, with introductory chapters on currency option theory and currency option markets.The book can be used as supplementary reading for graduate finance and international economics courses, as training material for central bank and regulatory authorities, or as a reference book for financial analysts.
Author: Shang-Jin Wei
Publisher:
ISBN:
Category : Foreign exchange
Languages : en
Pages : 62
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Book Description
Market participants' forecasts of future exchange rate volatility can be recovered from option contracts on foreign currencies. Such implicit volatility forecasts for four currencies are used to test rational expectations jointly with the applicability of the standard Black-Scholes formula. First, we examine the null hypothesis that the market-anticipated one-month-ahead standard deviation is an unbiased estimator of the subsequent realized standard deviation. The parametric regression method rejects this hypothesis overwhelmingly: the implicit forecasts are themselves excessively variable. Simulations indicate that the rejection is not caused by non-normality of the error term. Second, we use a nonparametric method to test a weaker version of market rationality: the market can correctly forecast the direction of the change in exchange rate volatility. This time, the weaker version of rationality is confirmed- Third, we investigate how market forecasts are formed. We find some evidence that market participants put heavy weight on lagged volatility when forecasting future volatility. Finally, results from the Alternating Conditional Expectations algorithm provide further support for the central finding that when the market predicts a large deviation of volatility from its mean, it could do better by moderating its forecast.
Author: Philippe Jorion
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Measures of volatility implied in option prices are widely believed to be the best available volatility forecasts. In this paper, we examine the information content and predictive power of Implied Standard Deviations (ISD's) derived from CME options on foreign currency futures. The paper finds that statistical time- series models, even when given the advantage of quot;ex postquot; parameter estimates, are outperformed by ISD's. ISD's, however, also appear to be biased volatility forecasts. Using simulations to investigate the robustness of these results, the paper finds that measurement errors and statistical problems can substantially distort inferences. Even accounting for these, however, ISD's appear to be too variable relative to future volatility.
Author: Louis O. Scott
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 44
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Book Description
Prices in futures markets and option markets reflect expectations about future price movements in spot markets, but these prices can also be influenced by risk premia. Futures and forward prices are sometimes interpreted as market expectations for future spot prices, and option prices are used to calculate the market’s expectations for future volatility of spot prices. Do these prices accurately reflect market expectations? The purpose of this paper is to examine the information that is reflected in futures prices and option prices. The issue is examined by reviewing both the relevant analytical models and the empirical evidence.
Author: Vicentiu Covrig
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Previous studies of the quality of market forecasted future volatility in currency options use implied volatilities from exchange-traded currency options markets, and find that though implied volatility has substantial informational content, it is a biased predictor of future volatility. However, such empirical results are likely to be affected by two sources of well-documented errors: measurement errors in model inputs and errors in the option pricing model that is used for computation.This paper focuses on the former source of errors, and differs from previous studies in that it uses quoted implied volatility data from the OTC currency option market. The institutional features of the OTC market alleviate the measurement problems that are found in studies which use implied volatility that is derived from exchange-traded option prices. Unlike exchange traded currency option markets, in which market players quote option prices in terms of option premiums, in the OTC currency option market the price quotes are actually made in terms of volatility, which is expressed as a percentage per annum. Furthermore, the OTC currency options have daily quotes for standard maturities, allowing us to study the market's ability to forecast future volatility for different time horizons.The evidence shows that quoted implied volatility is an unbiased estimator of future volatility at the one-month horizon, but its predictive power decreases with longer horizons. The results are consistent with the Figlewski (1997) hypothesis that the informational content of quoted implied volatility is positively related to liquidity. The results also indicate that the quoted implied volatility has more predictive power than the historical standard deviation, RiskMetrics, and GARCH-based volatility forecasts across all of the currency pairs and forecasting horizons.These results are consistent with the argument that measurement errors have a substantial effect on the implied volatility estimator and the quality of the inferences that are based on it.
Author: Graham Elliott
Publisher: Elsevier
ISBN: 0444627405
Category : Business & Economics
Languages : en
Pages : 667
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Book Description
The highly prized ability to make financial plans with some certainty about the future comes from the core fields of economics. In recent years the availability of more data, analytical tools of greater precision, and ex post studies of business decisions have increased demand for information about economic forecasting. Volumes 2A and 2B, which follows Nobel laureate Clive Granger's Volume 1 (2006), concentrate on two major subjects. Volume 2A covers innovations in methodologies, specifically macroforecasting and forecasting financial variables. Volume 2B investigates commercial applications, with sections on forecasters' objectives and methodologies. Experts provide surveys of a large range of literature scattered across applied and theoretical statistics journals as well as econometrics and empirical economics journals. The Handbook of Economic Forecasting Volumes 2A and 2B provide a unique compilation of chapters giving a coherent overview of forecasting theory and applications in one place and with up-to-date accounts of all major conceptual issues. - Focuses on innovation in economic forecasting via industry applications - Presents coherent summaries of subjects in economic forecasting that stretch from methodologies to applications - Makes details about economic forecasting accessible to scholars in fields outside economics
Author: Jeffrey A. Frankel
Publisher: University of Chicago Press
ISBN: 0226260232
Category : Business & Economics
Languages : en
Pages : 358
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Book Description
The foreign exchange market is the largest, fastest-growing financial market in the world. Yet conventional macroeconomic approaches do not explain why people trade foreign exchange. At the same time, they fail to explain the short-run determinants of the exchange rate. These nine innovative essays use a microstructure approach to analyze the workings of the foreign exchange market, with special emphasis on institutional aspects and the actual behavior of market participants. They examine the volume of transactions, heterogeneity of traders, the time of day and location of trading, the bid-ask spread, and the high level of exchange rate volatility that has puzzled many observers. They also consider the structure of the market, including such issues as nontransparency, asymmetric information, liquidity trading, the use of automated brokers, the relationship between spot and derivative markets, and the importance of systemic risk in the market. This timely volume will be essential reading for anyone interested in the economics of international finance.
Author: Jens Carsten Jackwerth
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
Author: John C. Cox
Publisher: Prentice Hall
ISBN:
Category : Business & Economics
Languages : en
Pages : 518
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Book Description
Includes the first published detailed description of option exchange operations, the first published treatment using only elementary mathematics and the first step-by-step procedure for implementing the Black-Scholes formula in actual trading.
