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Is it Worth Tracking Dollar/Real Implied Volatility?

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  • Sandro Canesso de Andrade
  • Benjamin Miranda Tabak

Abstract

In this paper we examine the relation between dollar-real exchange rate volatility implied in option prices and subsequent realized volatility, in the period of February 1999 to June 2000. Our results are in line with recent literature, suggesting that the implied volatility obtained from a simple option-pricing model, although an upward-biased estimator of future volatility does provide information about volatility over the remaining life of the option, which is not present in past returns. Results are robust to the choice of two alternative time series models to explore information embedded in returns, a fixed volatility and a GARCH (1,1) model, even allowing for in-sample forecasts by the GARCH (1,1) model. Results are also robust to the choice of measuring realized volatility in two alternative ways.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps15.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 15.

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Date of creation: Mar 2001
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Publication status: Published in Economia Aplicada (Brazilian Journal of Applied Economics), Vol. 5, no. 3 (Jul-Sep 2001).
Handle: RePEc:bcb:wpaper:15

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Web page: http://www.bcb.gov.br/?english

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Cited by:
  1. Arminio Fraga & Ilan Goldfajn & André Minella, 2004. "Inflation Targeting in Emerging Market Economies," NBER Chapters, in: NBER Macroeconomics Annual 2003, Volume 18, pages 365-416 National Bureau of Economic Research, Inc.
  2. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
  3. Mark R. Stone & W. Christopher Walker & Yosuke Yasui, 2009. "From Lombard Street to Avenida Paulista," IMF Working Papers 09/259, International Monetary Fund.
  4. Chang, E.J. & Guerra, S.M. & Lima, E.J.A. & Tabak, B.M., 2008. "The stability-concentration relationship in the Brazilian banking system," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 18(4), pages 388-397, October.
  5. Benjamin Miranda Tabak, 2003. "On the Information Content of Oil Future Prices," Working Papers Series 65, Central Bank of Brazil, Research Department.
  6. André Soares Loureiro & Fernando de Holanda Barbosa, 2004. "Risk Premia for Emerging Markets Bonds: Evidence from Brazilian Government Debt, 1996-2002," Working Papers Series 85, Central Bank of Brazil, Research Department.
  7. Benjamin Miranda Tabak & Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
  8. Tarsila Segalla Afanasieff & Priscilla Maria Villa Lhacer & Márcio I. Nakane, 2002. "The Determinants of Bank Interest Spread in Brazil," Working Papers Series 46, Central Bank of Brazil, Research Department.
  9. Benjamin Miranda Tabak, 2003. "Monetary Policy Surprises and the Brazilian Term Structure of Interest Rates," Working Papers Series 70, Central Bank of Brazil, Research Department.
  10. Victorio Yi Tson Chu, 2002. "Credit Channel with Sovereign Credit Risk: an Empirical Test," Working Papers Series 51, Central Bank of Brazil, Research Department.
  11. Charles Lima De Almeida & Marco AuréLIO Peres & Geraldo Da Silva E Souza & Benjamin Miranda Tabak, 2003. "Optimal monetary rules: the case of Brazil," Applied Economics Letters, Taylor & Francis Journals, vol. 10(5), pages 299-302, April.
  12. André Minella & Paulo Springer de Freitas & Ilan Goldfajn & Marcelo Kfoury Muinhos, 2003. "Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility," Working Papers Series 77, Central Bank of Brazil, Research Department.
  13. Paulo Coutinho & Benjamin Miranda Tabak, 2002. "Delegated Portfolio Management," Working Papers Series 60, Central Bank of Brazil, Research Department.
  14. Marcelo Kfoury Muinhos & Márcio I. Nakane, 2006. "Comparing equilibrium real interest rates: different approaches to measure Brazilian rates," Working Papers Series 101, Central Bank of Brazil, Research Department.
  15. Aloisio Araujo & Marcia Leon, 2004. "Speculative Attacks on Debts and Optimum Currency Area: A Welfare Analysis," Working Papers Series 84, Central Bank of Brazil, Research Department.
  16. Eui Jung Chang & Marcelo Kfoury Muinhos & Joanílio Rodolpho Teixeira, 2002. "Macroeconomic Coordination and Inflation Targeting in a Two-Country Model," Working Papers Series 50, Central Bank of Brazil, Research Department.

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