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Testing the Expectations Hypothesis on the Term Structure of Volatilities in Foreign Exchange Options

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Author Info
 Campa, Jose Manuel
Chang, P H Kevin

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Abstract

This article tests the expectations hypothesis in the term structure of volatilities in foreign exchange options. In particular, it addresses whether long-dated volatility quotes are consistent with expected future short-dated volatility quotes, assuming rational expectations. For options observed daily from December 1, 1989 to August 31, 1992 on dollar exchange rates against the pound, mark, yen, and Swiss franc, the authors are unable to reject the expectations hypothesis in the great majority of cases. The current spread between long- and short-dated volatility rates proves to be a significant predictor of the direction of future short-dated rates. Copyright 1995 by American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 50 (1995)
Issue (Month): 2 (June)
Pages: 529-47
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Handle: RePEc:bla:jfinan:v:50:y:1995:i:2:p:529-47

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  1. Nobuya Takezawa & Noriyoshi Shiraishi, 1998. "A Note on the Term Structure of Implied Volatilities for the Yen/U.S. Dollar Currency Option," Asia-Pacific Financial Markets, Springer, vol. 5(3), pages 227-236, November. [Downloadable!] (restricted)
  2. Eric Ghysels & Andrew Harvey & Éric Renault, 1995. "Stochastic Volatility," CIRANO Working Papers 95s-49, CIRANO. [Downloadable!]
    Other versions:
  3. Franco Molinari, 1998. "Arbitrage risk neutral probability measures," Quaderni DISA 008, Department of Computer and Management Sciences, University of Trento, Italy.
  4. Christian Walter & Jose Lopez, 1997. "Is implied correlation worth calculating? Evidence from foreign exchange options and historical data," Research Paper 9730, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  5. Pilar Corredor-Casado & Rafael Santamaría-Aquilué, 2000. "La estructura temporal de las volatilidades implícitas en la opción sobre el IBEX-35," Investigaciones Economicas, Fundación SEPI, vol. 24(2), pages 385-417, May. [Downloadable!]
  6. Pilar Corredor Casado & Rafael Santamaría, . "La estructura temporal de las volatilidades implícitas en la opción sobre el Ibex-35," Studies on the Spanish Economy 04, FEDEA. [Downloadable!]
  7. Peter Carr & Liuren Wu, 2004. "Stochastic Skew in Currency Options," Finance 0409014, EconWPA. [Downloadable!]
  8. Martin Mandler, 2002. "Extracting Market Expectations from Option Prices: Two Case Studies in Market Perceptions of the ECB's Monetary Policy 1999/2000," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 138(II), pages 165-189, June. [Downloadable!]
  9. Alessandro Beber & Luca Erzegovesi, 1999. "Distribuzioni di probabilità implicite nei prezzi delle opzioni," Alea Tech Reports 008, Department of Computer and Management Sciences, University of Trento, Italy. [Downloadable!]
  10. Jose M. Campa & P. H. Kevin Chang, 1997. "The Forecasting Ability of Correlations Implied in Foreign Exchange Options," NBER Working Papers 5974, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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