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The information content of currency option-implied volatilities: implications for ex-ante forecasts of global equity correlations

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  • Antonio Figueiredo
  • Ali M. Parhizgari
  • Brice Dupoyet

Abstract

We use existing currency models, global capital flows, international parity, the Taylor rule, and some simplifying assumptions to derive and empirically test a link between the information contained in currency option-implied volatilities and future global equity correlations. Using data from January 1999 to May 2020, we test our hypothesis and find that exchange rate option-implied volatilities — coupled with one-period ex-post correlations — more accurately predict subsequent world equity market correlations than other models. Our findings have implications for portfolio diversification, forecasts of overall equity portfolio volatility, and portfolio optimization.

Suggested Citation

  • Antonio Figueiredo & Ali M. Parhizgari & Brice Dupoyet, 2023. "The information content of currency option-implied volatilities: implications for ex-ante forecasts of global equity correlations," The European Journal of Finance, Taylor & Francis Journals, vol. 29(18), pages 2128-2153, December.
    • Handle: RePEc:taf:eurjfi:v:29:y:2023:i:18:p:2128-2153
    DOI: 10.1080/1351847X.2023.2189020
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