Cross-dynamics of volatility term structures implied by foreign exchange options

Krylova, Elizaveta; Nikkinen, Jussi; Vähämaa, Sami

doi:10.1016/j.jeconbus.2009.01.002

Cited by 12 publications

(4 citation statements)

References 49 publications

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“…These events, together with recent empirical evidence (see e.g., Inagaki, 2007;Kearney and Patton, 2000;Krylova et al, 2009;Nikkinen et al, 2006), suggest that market expectations and uncertainty about exchange rate movements are affected not only by country-specific economic fundamentals and monetary policy but also by common uncertainty factors.…”

Section: Introductionmentioning

confidence: 85%

Cross-dynamics of exchange rate expectations: a wavelet analysis

et al. 2010

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This paper focuses on the cross-dynamics of exchange rate expectations over different time-scales. We use overthe-counter currency options on the euro, Japanese yen, and British pound vis-a`-vis the U.S. dollar to extract expected probability density functions of future exchange rates, and apply recent wavelet cross-correlation techniques to analyze linkages in these option-implied exchange rate expectations. The results show that market expectations are closely linked among the three major exchange rates. Regardless of time-scales, we find significant lead-lag relationships between the expected exchange rate probability densities. Nevertheless, our findings also indicate that the dynamic structure of exchange rate expectations may vary over different time-scales. In terms of short-run linkages in volatility expectations, the Japanese yen seems to have a leading role among the exchange rate triplet. At the longer scale, however, we also find significant feedback effects from the GBP/USD volatility expectations to the JPY/USD implied volatilities. The wavelet cross-correlations between the higher-order moments of option-implied exchange rate distributions indicate that the expectations about the JPY/USD rate are virtually unrelated to the developments of the European currencies, while the higher-order moments of the EUR/USD and GBP/USD densities appear strongly linked with each other.

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Section: Introductionmentioning

confidence: 85%

Cross-dynamics of exchange rate expectations: a wavelet analysis

et al. 2010

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“…The present estimation of the VIX futures term structure (following Äijö (2008), Krylova et al (2009), and Fassas (2012)) was conducted on each trading day by fitting a linear model of the available futures prices and spot VIX level as a function of time to maturity based on the least squares criterion using the following specification:…”

Section: The Vix Futures Term Structurementioning

confidence: 99%

“…With respect to the above framework, this paper is motivated by these earlier studies that examined the relationship between VIX and future equity returns and examined the market timing ability of the VIX futures term structure regarding future stock movements. The volatility term structure is, in principle, analogous to the term structure of interest rates and, thus, it may provide information about expected future short-term volatilities (Krylova et al 2009). In addition, it also reflects the different variance risk premia for different time horizons (Johnson 2017).…”

Section: Introductionmentioning

confidence: 99%

VIX Futures as a Market Timing Indicator

Fassas

Hourvouliades

2019

JRFM

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Our work relates to the literature supporting that the VIX also mirrors investor sentiment and, thus, contains useful information regarding future S&P500 returns. The objective of this empirical analysis is to verify if the shape of the volatility futures term structure has signaling effects regarding future equity price movements, as several investors believe. Our findings generally support the hypothesis that the VIX term structure can be employed as a contrarian market timing indicator. The empirical analysis of this study has important practical implications for financial market practitioners, as it shows that they can use the VIX futures term structure not only as a proxy of market expectations on forward volatility, but also as a stock market timing tool.

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“…explore the economic determinants of Euro interest rate caps and floors and find that the spot rate, the slope of the yield curve and the cost of liquidity in the options market are relevant for determining the implied volatility surface. Different from these studies, we focus on how information from economic variables in one country helps explain the variation of the option smile dynamics for another currency.3 The papers byKrylova et al (2009) and Nikkinen et al (2006) use similar samples as this study; however, they do not address the question of what are the economic determinants of the entire IVS shape. © 2015 John Wiley & Sons, Ltd.…”

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confidence: 99%

Cross Economic Determinants of Implied Volatility Smile Dynamics: Three Major European Currency Options

Han

Liang

2015

Euro Fin Management

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This paper examines the contemporaneous and lead–lag relationships between economic variables and implied volatility smiles for three major European currency options. We find that cross economic determinants are at least as important as own economic variables in explaining the dynamics of implied volatility smiles. Out‐of‐sample tests also suggest that cross economic variables are important in predicting an economy's currency option smile. These findings suggest that the price impact from cross economic determinants may help fill the gap between the theoretical and the practical implied volatility skews.

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Cross-dynamics of volatility term structures implied by foreign exchange options

Cited by 12 publications

References 49 publications

Cross-dynamics of exchange rate expectations: a wavelet analysis

Cross-dynamics of exchange rate expectations: a wavelet analysis

VIX Futures as a Market Timing Indicator

Cross Economic Determinants of Implied Volatility Smile Dynamics: Three Major European Currency Options

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