Stochastic Skew in Currency Options
New York University (NYU) - Courant Institute of Mathematical Sciences
City University of New York, CUNY Baruch College - Zicklin School of Business
NYU Working Paper No. SC-CFE-04-02
We document the behavior of over-the-counter currency option prices across moneyness, maturity, and calendar time on two of the most actively traded currency pairs over the past eight years. We find that the risk-neutral distribution of currency returns is relatively symmetric on average. However, on any given date, the conditional currency return distribution can show strong asymmetry. This asymmetry varies greatly over time and often switch directions. We design and estimate a class of models that capture these unique features of the currency options prices and perform much better than traditional jump-diffusion stochastic volatility models.
Number of Pages in PDF File: 65working papers series
Date posted: November 7, 2008
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 1.563 seconds