The probability distribution of futures prices in the foreign exchange market: A comparison of candidate processes

Fujihara, Roger A.; Park, Keehwan

doi:10.1002/fut.3990100606

Cited by 24 publications

(11 citation statements)

References 34 publications

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“…Venkateswaran et al (1993) indicate significant leptokurtosis for futures traded in the US. Also, in this market, there is a lack of independence caused by time varying variances (Fujihara and Park, 1990). To a lesser extent, skewness is documented, and it is systematic in these contracts (Junkus, 1991).…”

Section: Literature Reviewmentioning

confidence: 97%

“…Recently, models that incorporated this conditional dependence have been developed and applied to futures prices with varying success. Those models which have gained the widest support for US traded futures are the ARCH (Fujihara and Park, 1990) and related frameworks such as the GARCH-inmean ~GARCH-M (McCurdy and Morgan, 1988). The stable and ARCH models have a close link as they assume non constant parameters, and more importantly, they both explain volatility clustering (Mills, 1996).…”

Section: Literature Reviewmentioning

confidence: 99%

“…In this context many alternative distributional models have been suggested for their applicability in correctly describing properties of futures price series. Those that have attracted strong attention include the stable paretian (Hudson et al, 1987;and So, 1987), the mixtures of normals (Hall et al, 1989), the mixtures of stables (Gribbin et al, 1992), ARCH (Fujihara and Park, 1990) and GARCH-M (McCurdy and Morgan, 1988). To examine the applicability of the above noted distributional forms the stability under additions procedure, as developed by McCulloch (1986), is employed.…”

Section: Introductionmentioning

confidence: 99%

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The Distributional Characteristics of a Selection of Contracts Traded on the London International Financial Futures Exchange

Cotter

McKillop

2000

Business Fin & Account

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This study examines the distributional properties of futures prices for contracts traded on LIFFE. A filtering process is employed to remove day of the week and holiday effects, a maturity effect, moving average effects and the influence of an asset's conditional variance from the raw returns series. Alternative distributional models from the stable paretian and ARCH families are examined for their applicability to futures data using a stability under additions. The results conclusively reject the hypothesis that futures returns are normally distributed with findings in favour of two related hypotheses -the mixtures of stable distribution and the ordinary stable distribution.

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Section: Literature Reviewmentioning

confidence: 97%

Section: Literature Reviewmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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The Distributional Characteristics of a Selection of Contracts Traded on the London International Financial Futures Exchange

Cotter

McKillop

2000

Business Fin & Account

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“…associated with thin trading. 8 Hall, Brorsen, and Irwin (1989), Fujihara and Park (1990), and Tse and Booth (1996) follow similar data construction processes as above. Throughout the paper, dependent variables are changes in spot values or futures values.…”

Section: Data and Estimationmentioning

confidence: 77%

ERM effects on currency spot and futures markets

Inci

2005

Global Finance Journal

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“…Johnston and Scott (1999), Hsieh (1988), Kugler and Lenz (1990), McCurdy and Morgan (1988) and Taylor (1986) support an autoregressive and conditional heteroskedasticity (ARCH) and a generalized ARCH (GARCH) type process. The study by Fujihara and Park (1990) find that three out of the five currencies they study support the ARCH model. and Heston and Nandi (2000) have developed a closed-form GARCH option valuation model.…”

Section: The Modelmentioning

confidence: 81%

Evaluation of Black-Scholes and GARCH Models Using Currency Call Options Data

Harikumar¹,

Boyrie²,

Pak³

2004

Review of Quantitative Finance and Accounting

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Abstract. This paper empirically examines the performance of Black-Scholes and Garch-M call option pricing models using call options data for British Pounds, Swiss Francs and Japanese Yen. The daily exchange rates exhibit an overwhelming presence of volatility clustering, suggesting that a richer model with ARCH/GARCH effects might have a better fit with actual prices. We perform dominant tests and calculate average percent mean squared errors of model prices. Our findings indicate that the Black-Scholes model outperforms the GARCH models. An implication of this result is that participants in the currency call options market do not seem to price volatility clusters in the underlying process.Key words: GARCH, currency options, Black-Scholes JEL Classification: G12, G13, G15Option pricing has its origins in the seminal works of Black-Scholes (1973) and Merton (1973). Empirical testing of these models did not become possible until Feigner and Jacquillat (1979) first proposed a market for currency options. In December of 1982, American Currency Options began trading in the Philadelphia Stock Exchange (PHLX). Today, this exchange lists six dollar-based standardized currency option contracts, which settle in the actual physical currency. These are Australian dollar, British Pound, Canadian Dollar, Euro, Japanese Yen and Swiss Franc.The Black and Scholes (1973) option-pricing model was the first to be used in pricing currency options; but, overtime and in practice, researchers have found that the prices estimated by the Black-Scholes model suffer from many biases. mentions that the Black-Scholes model exhibits under pricing of out-of-the money options, under pricing of options on low volatility securities and under pricing of short-maturity options and results in a U-shaped implied volatility curve. * We are grateful to Dr. Jin-Chuan Duan, Dr. Stewart Mayhew and the participants of the 2003 FMA International Meetings for valuable comments. We also thank Dr. Leigh Murray, New Mexico State University for statistical help and Dr. Jayashree Harikumar, Los Alamos National Laboratories, New Mexico for help with MATLAB. HARIKUMAR, DE BOYRIE AND PAKIn addressing these issues, some researchers have made refinements to the Black-Scholes model. Amin and Jarrow (1991) introduce a stochastic interest rate model in which the assumption of constant interest rates, both domestic and foreign, is relaxed. Hilliard, Madura and Tucker (1991) develop a currency option-pricing model under stochastic interest rates when interest rate parity holds. Their model assumes that domestic and foreign bond prices have local variances that depend only on time and not on other state variables such as the level of short-term interest rates. The authors test their option model and find that the stochastic interest rate model with domestic and foreign short term rates, driven by Arithmetic Brownian motion, exhibit greater pricing accuracy than the constant interest rate alternative. While modeling stochastic volatility, Heston and Nandi (2000) observe ...

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The probability distribution of futures prices in the foreign exchange market: A comparison of candidate processes

Cited by 24 publications

References 34 publications

The Distributional Characteristics of a Selection of Contracts Traded on the London International Financial Futures Exchange

The Distributional Characteristics of a Selection of Contracts Traded on the London International Financial Futures Exchange

ERM effects on currency spot and futures markets

Evaluation of Black-Scholes and GARCH Models Using Currency Call Options Data

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