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Analysing intraday implied volatility for pricing currency options

Le, Thi Ngoc Quynh (2020) Analysing intraday implied volatility for pricing currency options. PhD thesis, Murdoch University.

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Abstract

This research analyses the intraday implied volatility (IV) for pricing currency options. It conducts analyses in three steps. First, estimates at-the-money IV using the price of options with one-month, two-month, and three-month maturity during the opening, midday, and closing period of a trading day. Second, the Mincer-Zarnowitz regression test assessing the performance of IV to forecast the volatility of the underlying currency of options for the within-week, one-week, and one-month forecast horizon. Third, mean absolute error (MAE), mean squared error (MSE), and root mean squared error (RMSE) measures evaluating the performance of IV to estimate the price of currency options for the within-week, one-week, and one-month estimate horizon. It employs Australian dollar, British pound, Canadian dollar, Euro, and Swiss franc options trading from 01 January 2010 to 31 December 2017. This study reveals four critical findings. First, three-month maturity IV does not contain useful information about future volatility of the underlying currency and pricing currency options. Second, IV incorporates all information is not relevant to compute the price of currency options for less than a week estimate horizon. Third, IV of the closing period on Monday or Tuesday subsumes most of the essential information compared to other periods of a trading day and other days of a week to forecast volatility of the underlying currency and estimate the value of currency options. Fourth, the shorter (longer) maturity IV holds vital information to price currency options for the shorter (longer) estimate horizon. The overall research findings imply that the information content embedded in one-month and two-month maturity IV is appropriate to calculate the currency options price for the one-week and one-month estimate horizon, respectively. The intraday IV approach adds a new dimension to obtain the unobservable volatility in pricing currency options accurately for the researchers and practitioners.

Item Type: Thesis (PhD)
Murdoch Affiliation: Business
Supervisor(s): Hoque, Ariful, Gasbarro, Domenico and Hassan, Kamrul
URI: http://researchrepository.murdoch.edu.au/id/eprint/56979
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