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Currency option pricing and realized volatility

Manzur, M., Hoque, A. and Poitras, G. (2010) Currency option pricing and realized volatility. The Banking and Finance Review, 2 (1). pp. 73-86.

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Abstract

Volatility is a key parameter in currency option pricing. This paper examines alternative specifications of the volatility input to the Black-Scholes option pricing procedure. The focus is the relative performance of implied, realized, and GARCH-based models as predictors of market volatility to forecast currency options prices. Using exchange-traded, daily and intra-daily data for three major European currencies, the results indicate that the realized volatility model tends to outperform the other two specifications, both in-sample and out-of-sample. This result is intuitively appealing and expected to facilitate resolution of other problems in risk management applications.

Publication Type: Journal Article
Murdoch Affiliation: Murdoch Business School
Publisher: School of Business Central Connecticut State University
URI: http://researchrepository.murdoch.edu.au/id/eprint/39342
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