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Cross-dynamics of volatility term structures implied by foreign exchange options

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  • Krylova, Elizaveta
  • Nikkinen, Jussi
  • Vähämaa, Sami

Abstract

This paper examines the cross-dynamics of volatility term structure slopes implied by foreign exchange options. The empirical findings demonstrate that a few principal components can explain a vast proportion of the variation in volatility term structure slopes across the major exchange rates. Furthermore, the results indicate that the euro is the dominant currency, as the implied volatility term structure of the euro is found to affect all the other volatility term structures, while the term structure of the euro appears to be virtually unaffected by the other currencies. Finally, our results provide evidence of significant nonlinearities in the relationship between the euro and the Swiss franc.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 61 (2009)
Issue (Month): 5 (September)
Pages: 355-375

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Handle: RePEc:eee:jebusi:v:61:y::i:5:p:355-375

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Web page: http://www.elsevier.com/locate/jeconbus

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Keywords: Implied volatility Volatility term structure Foreign exchange options;

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References

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Cited by:
  1. Äijö, Janne, 2008. "Implied volatility term structure linkages between VDAX, VSMI and VSTOXX volatility indices," Global Finance Journal, Elsevier, vol. 18(3), pages 290-302.
  2. Inagaki, Kazuyuki, 2007. "Testing for volatility spillover between the British pound and the euro," Research in International Business and Finance, Elsevier, vol. 21(2), pages 161-174, June.

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