Foreign Exchange Market Volatility Information: An Investigation of Real-Dollar Exchange Rate
Price distributions estimation has become a relevant subject for risk and pricing literature. Special concern resides on tail probabilities, which usually presents more severe observations than those predicted by Normal distributions. This work aims to verify whether the volatility implied in dollar-real options contains useful information about unexpected large-magnitude returns. Implied volatility is also checked as a predictor for realized volatility. Our results indicate that implied volatilities indeed provide useful information on unusual returns and also work as a good predictor for observed volatility. Finally, we implement an early-warning system and implied volatilities seem to signalize large-magnitude returns.
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- Kaushik I. Amin & Robert A. Jarrow, 2008.
"Pricing foreign currency options under stochastic interest rates,"
World Scientific Book Chapters,
in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 14, pages 307-326
World Scientific Publishing Co. Pte. Ltd..
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