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The informational content of implied volatility: Application to the USD/JPY exchange rates

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  • Peng, Qing
  • Li, Jie
  • Zhao, Yu
  • Wu, Han

Abstract

This paper tests the information content of the Japanese Yen Implied Volatility Index (JYVIX) regarding the future volatility of USD/JPY exchange rates. We find that JYVIX contains significant information about future volatility, and it even has incremental predictive power over the traditional GARCH-Type models. Implicitly, JYVIX as a looking-forward index provides better forecasts on conditional volatility rather than realized volatility. Our analysis further shows that the forecastability of the GARCH-Type model combined with JYVIX is more credible than these individual models. Specifically, the EGARCH model combined with the exogenous variable JYVIX outperforms all prediction models. Our findings provide a better prediction approach to the volatility of USD/JPY exchange rates, which has far-reaching significance for risk management in Asian economies.

Suggested Citation

  • Peng, Qing & Li, Jie & Zhao, Yu & Wu, Han, 2021. "The informational content of implied volatility: Application to the USD/JPY exchange rates," Journal of Asian Economics, Elsevier, vol. 76(C).
    • Handle: RePEc:eee:asieco:v:76:y:2021:i:c:s1049007821000920
    DOI: 10.1016/j.asieco.2021.101363
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    2. Wang, Xinyu & Qi, Zikang & Huang, Jianglu, 2023. "How do monetary shock, financial crisis, and quotation reform affect the long memory of exchange rate volatility? Evidence from major currencies," Economic Modelling, Elsevier, vol. 120(C).

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    More about this item

    Keywords

    Volatility forecast; JYVIX; GARCH-Type models;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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