Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
963598 | Journal of International Financial Markets, Institutions and Money | 2009 | 18 Pages |
Abstract
Research has consistently found that implied volatility is a conditionally biased predictor of realized volatility across asset markets. This paper evaluates explanations for this bias in the market for options on foreign exchange futures. Several recently proposed solutions - including a model of priced volatility risk - fail to explain a significant portion of the conditional bias found in implied volatility. Further, while implied volatility fails to subsume econometric forecasts in encompassing regressions, these forecasts do not significantly improve delta-hedging performance. Thus this paper argues that statistical metrics are inappropriate measures of the information content of implied volatility. Implied volatility appears much more useful when measured by a more relevant, economic metric.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Christopher J. Neely,