Citation

Discussion Paper Details

Please find the details for DP7893 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Spot and Forward Volatility in Foreign Exchange

Author(s): Pasquale Della Corte, Lucio Sarno and Ilias Tsiakas

Publication Date: June 2010

Keyword(s): Foreign Exchange, Forward Volatility Agreement, Implied Volatility, Unbiasedness and Volatility Speculation

Programme Area(s): Financial Economics

Abstract: This paper investigates the empirical relation between spot and forward implied volatility in foreign exchange. We formulate and test the forward volatility unbiasedness hypothesis, which may be viewed as the volatility analogue to the extensively researched hypothesis of unbiasedness in forward exchange rates. Using a new data set of spot implied volatility quoted on over-the-counter currency options, we compute the forward implied volatility that corresponds to the delivery price of a forward contract on future spot implied volatility. This contract is known as a forward volatility agreement. We ?nd strong evidence that forward implied volatility is a systematically biased predictor that overestimates movements in future spot implied volatility. This bias in forward volatility generates high economic value to an investor exploiting predictability in the returns to volatility speculation and indicates the presence of predictable volatility term premiums in foreign exchange.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7893

Bibliographic Reference

Della Corte, P, Sarno, L and Tsiakas, I. 2010. 'Spot and Forward Volatility in Foreign Exchange'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7893