Abstract
We find knowledge of the volatility smile implied from foreign exchange options improves foreign exchange volatility forecast accuracy. The literature shows curvature of the smile can be captured by risk-neutral skewness and risk-neutral kurtosis and we find inclusion of these variables in forecast models improves volatility forecast accuracy. Further, delta-neutral hedged portfolio performance highlights the economic significance of incorporating knowledge of the smile in forecast models. Analysis is conducted using options with one month to maturity written on four exchange rate series, GBP/USD, EUR/USD, AUD/USD, and the USD/JPY from 2001 to 2006.
| Original language | English |
|---|---|
| Pages (from-to) | 286-312 |
| Number of pages | 27 |
| Journal | Journal of Futures Markets |
| Volume | 37 |
| Issue number | 3 |
| Early online date | Aug 2016 |
| DOIs | |
| Publication status | Published - 01 Mar 2017 |
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Volatility smile and one-month foreign currency volatility forecasts. / Wong, Alfred Huah Syn; Heaney, Richard A.
In: Journal of Futures Markets, Vol. 37, No. 3, 01.03.2017, p. 286-312.Research output: Contribution to journal › Article
TY - JOUR
T1 - Volatility smile and one-month foreign currency volatility forecasts
AU - Wong, Alfred Huah Syn
AU - Heaney, Richard A.
N1 - Includes bibliographical references.
PY - 2017/3/1
Y1 - 2017/3/1
N2 - We find knowledge of the volatility smile implied from foreign exchange options improves foreign exchange volatility forecast accuracy. The literature shows curvature of the smile can be captured by risk-neutral skewness and risk-neutral kurtosis and we find inclusion of these variables in forecast models improves volatility forecast accuracy. Further, delta-neutral hedged portfolio performance highlights the economic significance of incorporating knowledge of the smile in forecast models. Analysis is conducted using options with one month to maturity written on four exchange rate series, GBP/USD, EUR/USD, AUD/USD, and the USD/JPY from 2001 to 2006.
AB - We find knowledge of the volatility smile implied from foreign exchange options improves foreign exchange volatility forecast accuracy. The literature shows curvature of the smile can be captured by risk-neutral skewness and risk-neutral kurtosis and we find inclusion of these variables in forecast models improves volatility forecast accuracy. Further, delta-neutral hedged portfolio performance highlights the economic significance of incorporating knowledge of the smile in forecast models. Analysis is conducted using options with one month to maturity written on four exchange rate series, GBP/USD, EUR/USD, AUD/USD, and the USD/JPY from 2001 to 2006.
UR - http://www.scopus.com/inward/record.url?scp=84994229350&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84994229350&partnerID=8YFLogxK
U2 - 10.1002/fut.21799
DO - 10.1002/fut.21799
M3 - Article
AN - SCOPUS:84994229350
VL - 37
SP - 286
EP - 312
JO - Journal of Futures Markets
JF - Journal of Futures Markets
SN - 0270-7314
IS - 3
ER -