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The information content of implied volatility in developed versus developing FX markets

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  • Nicoleta Iliescu
  • Satyaki Dutta

Abstract

This article predicts the daily movement of monthly foreign exchange (FX) rate volatility using a linear combination of a time-series model and implied volatilities from options. The focus is on analysing the FX volatilities in three developing economies (the Brazilian real (BRL), the Indian rupee (INR) and the Russian ruble (RUB)) against the US dollar (USD). The empirical exercise utilizes two time-series models, mixed data sampling (MIDAS) and GARCH. The analysis indicates that for both developed and developing economies the predictive power of MIDAS and that of GARCH is comparable. Further on in this article, we will ascertain whether the relationship between realized and implied volatility is fundamentally different in the case of developing economies from that among developed economies. Thus, we compare the pairs USD/BRL, USD/INR and USD/RUB against EURO/USD and USD/Japanese yen to determine the information content and predictive power of implied volatilities. Plots of the MIDAS coefficients show that the volatility is more persistent in developing economies than in developed economies.

Suggested Citation

  • Nicoleta Iliescu & Satyaki Dutta, 2016. "The information content of implied volatility in developed versus developing FX markets," Applied Economics, Taylor & Francis Journals, vol. 48(55), pages 5396-5404, November.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:55:p:5396-5404
    DOI: 10.1080/00036846.2016.1178844
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