Volatility in currency markets

Abstract

Restates the importance of asset volatility forecasts for option pricing and portfolio management and outlines previous research on forecasting models. Discusses the relative information content and predictive power of implied and historical volatility and the existence of overreaction in option markets. Analyses 1989‐1997 daily exchange rate data for six currencies to examine this. Presents the results, which suggest that implied volatility has more information than volatility based on past prices; and is better than GARCH‐based or historic volatility forecasts for horizons up to three months; but can be a biased predictor of future realized volatility. Finds limited evidence that long term volatilities in option prices overreact to short term volatilities.

Citation

Kazantzis, C.I. and Tessaromatis, N.P. (2001), "Volatility in currency markets", Managerial Finance, Vol. 27 No. 6, pp. 1-22. https://doi.org/10.1108/03074350110767204