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Expectations Hypothesis of the Term Structure of Implied Volatility: Evidence from Foreign Currency and Stock Index Options

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  • Soku Byoun
  • Chuck C. Y. Kwok
  • Hun Y. Park
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    Abstract

    Using a stochastic volatility option pricing model, we show that the implied volatilities of at-the-money options are not necessarily unbiased and that the fixed interval time-series can produce misleading results. Our results do not support the expectations hypothesis: long-term volatilities rise relative to short-term volatilities, but the increases are not matched as predicted by the expectations hypothesis. In addition, an increase in the current long-term volatility relative to the current short-term volatility is followed by a subsequent decline. The results are similar for both foreign currency and the S&P 500 stock index options. , .

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    Bibliographic Info

    Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

    Volume (Year): 1 (2003)
    Issue (Month): 1 ()
    Pages: 126-151

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    Handle: RePEc:oup:jfinec:v:1:y:2003:i:1:p:126-151

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    Cited by:
    1. F. Comte & L. Coutin & E. Renault, 2012. "Affine fractional stochastic volatility models," Annals of Finance, Springer, Springer, vol. 8(2), pages 337-378, May.
    2. 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.
    3. repec:wyi:journl:002217 is not listed on IDEAS
    4. Krylova, Elizaveta & Nikkinen, Jussi & Vähämaa, Sami, 2009. "Cross-dynamics of volatility term structures implied by foreign exchange options," Journal of Economics and Business, Elsevier, Elsevier, vol. 61(5), pages 355-375, September.
    5. Mixon, Scott, 2007. "The implied volatility term structure of stock index options," Journal of Empirical Finance, Elsevier, Elsevier, vol. 14(3), pages 333-354, June.

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