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Tracking Brazilian Exchange Rate Volatility

Author

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  • Benjamin Miranda Tabak
  • Sandro Canesso de Andrade
  • Eui Jung Chang

Abstract

This paper examines the relation between dollar-real exchange rate volatility implied in option prices and subsequent realized volatility. It investigates whether implied volatilities contain information about volatility over the remaining life of the option which is not present in past returns. Using GMM estimation consistent with telescoping observations evidence suggests that implied volatilities give superior forecasts of realized volatility if compared to GARCH(p,q), and Moving Average predictors, and that econometric models forecasts do not provide significant incremental information to that contained in implied volatilities.

Suggested Citation

  • Benjamin Miranda Tabak & Sandro Canesso de Andrade & Eui Jung Chang, 2004. "Tracking Brazilian Exchange Rate Volatility," Econometric Society 2004 Far Eastern Meetings 487, Econometric Society.
  • Handle: RePEc:ecm:feam04:487
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    File URL: http://repec.org/esFEAM04/up.29425.1077122782.pdf
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    References listed on IDEAS

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    1. Fair, Ray C & Shiller, Robert J, 1990. "Comparing Information in Forecasts from Econometric Models," American Economic Review, American Economic Association, vol. 80(3), pages 375-389, June.
    2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, pages 307-327.
    3. David Backus & Silverio Foresi & Liuren Wu, 2002. "Accouting for Biases in Black-Scholes," Finance 0207008, EconWPA.
    4. Canina, Linda & Figlewski, Stephen, 1993. "The Informational Content of Implied Volatility," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 659-681.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Blair, Bevan J. & Poon, Ser-Huang & Taylor, Stephen J., 2001. "Forecasting S&P 100 volatility: the incremental information content of implied volatilities and high-frequency index returns," Journal of Econometrics, Elsevier, vol. 105(1), pages 5-26, November.
    7. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
    8. Campa, Jose Manuel & Chang, P. H. Kevin, 1998. "The forecasting ability of correlations implied in foreign exchange options," Journal of International Money and Finance, Elsevier, vol. 17(6), pages 855-880, December.
    9. Amin, Kaushik I & Ng, Victor K, 1997. "Inferring Future Volatility from the Information in Implied Volatility in Eurodollar Options: A New Approach," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 333-367.
    10. Christensen, B. J. & Prabhala, N. R., 1998. "The relation between implied and realized volatility," Journal of Financial Economics, Elsevier, vol. 50(2), pages 125-150, November.
    11. Bates, David S., 2000. "Post-'87 crash fears in the S&P 500 futures option market," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 181-238.
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    More about this item

    Keywords

    implied volatility; telescoping observations; GMM;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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