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Stochastic skew in currency options

  • Carr, Peter
  • Wu, Liuren

We document the behavior of over-the-counter currency option prices across moneyness, maturity, and calendar time on two of the most actively traded currency pairs over the past eight years. We find that the risk-neutral distribution of currency returns is relatively symmetric on average. However, on any given date, the conditional currency return distribution can show strong asymmetry. This asymmetry varies greatly over time and often switch directions. We design and estimate a class of models that capture these unique features of the currency options prices and perform much better than traditional jump- diffusion stochastic volatility models.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 86 (2007)
Issue (Month): 1 (October)
Pages: 213-247

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Handle: RePEc:eee:jfinec:v:86:y:2007:i:1:p:213-247
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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  18. Torben G. Andersen & Luca Benzoni & Jesper Lund, 2001. "An Empirical Investigation of Continuous-Time Equity Return Models," NBER Working Papers 8510, National Bureau of Economic Research, Inc.
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  22. Peter Carr & Liuren Wu, 2002. "Time-Changed Levy Processes and Option Pricing," Finance 0207011, EconWPA.
  23. Jose M. Campa & P.H. Kevin Chang & Robert L. Reider, 1997. "Implied Exchange Rate Distributions: Evidence from OTC Option Markets," NBER Working Papers 6179, National Bureau of Economic Research, Inc.
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