Skip to main content
×
Home
    • Aa
    • Aa

The Term Structure of Volatility Implied by Foreign Exchange Options

Abstract
Abstract

This paper illustrates regression and Kalman filtering methods for estimating the time-varying term structure of volatility expectations revealed by options prices. Short- and long-term expectations are estimated for four currencies using daily PHLX options prices from 1985 to 1989. Throughout this period, there were important differences between shortand long-term expectations. The slope of the term structure changed frequently and there were significant variations in long-term volatility expectations. The expectation estimates can be used to value OTC options, to improve hedging strategies, and to test the hypothesis that the options market overreacts.

Copyright
Linked references
Hide All

This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

G. Barone-Adesi , and R. E. Whaley . “Efficient Analytic Approximation of American Option Values.” Journal of Finance, 42 (061987), 301320.

T. Bollerslev ; R. Y. Chou ; and K. F. Kroner . “ARCH Modeling in Finance: a Review of the Theory and Empirical Evidence.” Journal of Econometrics, 52 (041992), 559.

T. E. Day , and C. M. Lewis . “The Behaviour of the Volatility Implicit in the Prices of Stock Index Options.” Journal of Financial Economics, 22 (101988), 103122.

T. E. Day , and C. M. Lewis .“Stock Market Volatility and the Information Content of Stock Index Options.” Journal of Econometrics, 52 (041992), 267287.

F. Diz , and T. J. Finucane . “Do the Options Markets Really Overreact?Journal of Futures Markets, 13 (061993), 299312.

J. R. Franks , and E. S. Schwartz . “The Stochastic Behaviour of Market Variance Implied in the Prices of Index Options.” The Economic Journal, 101 (111991), 14601475.

R. Heynen ; A. G. Z. Kemna ; and T. Vorst . “Analysis of the Term Structure of Implied Volatilities.” Journal of Financial and Quantitative Analysis, 29 (031994), 3156.

J. Hull , and A. White . “The Pricing of Options on Assets with Stochastic Volatilities.” Journal of Finance, 42 (061987), 281300.

C. G. Lamoureux , and W. D. Lastrapes . “Forecasting Stock Return Variance: Toward an Understanding of Stochastic Implied Volatilities.” Review of Financial Studies, 6 (Summer1993), 293326.

L. J. Merville , and D. R. Pieptea . “Stock Price Volatility, Mean-Reverting Diffusion, and Noise.” Journal of Financial Economics, 24 (091989), 193214.

B. G. Resnick ; A. M. Sheikh ; and Y. Song . “Time Varying Volatilities and Calculation of the Weighted Implied Standard Deviation.” Journal of Financial and Quantitative Analysis, 28 (091993), 417430.

K. Shastri , and K. Wethyavivorn . “The Valuation of Currency Options for Alternate Stochastic Processes.” Journal of Financial Research, 10 (No. 2, 1987), 283293.

A. M. Sheikh Transaction Data Tests of S&P 100 Call Option Pricing.” Journal of Financial and Quantitative Analysis, 26 (121991), 459475.

E. M. Stein , and J. C. Stein . “Stock Price Distributions with Stochastic Volatility: An Analytic Approach.” Review of Financial Studies, 4 (Winter1991), 727752.

J. C. Stein Overreactions in the Options Market.” Journal of Finance, 44 (091989), 10111023.

X. Xu , and S. J. Taylor . “Conditional Volatility and the Informational Efficiency of the PHLX Currency Options Market.” Journal of Banking and Finance, 19 (forthcoming 091995).

Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
×

Metrics

Full text views

Total number of HTML views: 0
Total number of PDF views: 18 *
Loading metrics...

Abstract views

Total abstract views: 834 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 23rd March 2017. This data will be updated every 24 hours.