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Forecasting EUR–USD implied volatility: The case of intraday data

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  • Dunis, Christian
  • Kellard, Neil M.
  • Snaith, Stuart

Abstract

This study models and forecasts the evolution of intraday implied volatility on an underlying EUR–USD exchange rate for a number of maturities. To our knowledge we are the first to employ high frequency data in this context. This allows the construction of forecasting models that can attempt to exploit intraday seasonalities such as overnight effects. Results show that implied volatility is predictable at shorter horizons, within a given day and across the term structure. Moreover, at the conventional daily frequency, intraday seasonality effects can be used to augment the forecasting power of models. The type of inefficiency revealed suggests potentially profitable trading models.

Suggested Citation

  • Dunis, Christian & Kellard, Neil M. & Snaith, Stuart, 2013. "Forecasting EUR–USD implied volatility: The case of intraday data," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4943-4957.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:4943-4957
    DOI: 10.1016/j.jbankfin.2013.08.028
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    References listed on IDEAS

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    Cited by:

    1. Yanhui Chen & Kin Lai & Jiangze Du, 2014. "Modeling and forecasting Hang Seng index volatility with day-of-week effect, spillover effect based on ARIMA and HAR," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 4(2), pages 113-132, December.

    More about this item

    Keywords

    Exchange rates; Implied volatility; Intraday data; Out-of-sample prediction;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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