Efficiency tests with overlapping data: an application to the currency options market
AbstractThis paper presents the results of an empirical study into the efficiency of the currency options market. The methodology derives from a simple model often applied to the spot and forward markets for foreign exchange. It relates the historic volatility of the underlying asset to the implied volatility of an option on the underlying at a specified prior time and then proceeds to test obvious hypotheses about the values of the coefficients. The study uses panel regression to address the problem of overlapping data which leads to dependence between observations. It also uses volatility data directly quoted on the market in order to avoid the biases which may occur when 'backing out' volatility from specific option pricing models. In general, the evidence rejects the hypothesis that the currency option market is efficient. This suggests that implied volatility is not the best predictor of future exchange rate volatility and should not be used without modification: the models presented in this paper could be a way of producing revised forecasts.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal The European Journal of Finance.
Volume (Year): 1 (1995)
Issue (Month): 4 ()
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- Christian Dunis & Pierre Lequeux, 2000. "Intraday data and hedging efficiency in interest spread trading," The European Journal of Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 6(4), pages 332-352.
- Kellard, Neil & Dunis, Christian & Sarantis, Nicholas, 2010. "Foreign exchange, fractional cointegration and the implied-realized volatility relation," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 882-891, April.
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