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Is it Worth Tracking Dollar/Real Implied Volatility?

Listed author(s):
  • Sandro Canesso de Andrade
  • Benjamin Miranda Tabak

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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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
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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