Performance, Bias, and Efficiency of Foreign Exchange Correlation Forecasts
53 Pages Posted: 18 Mar 2008
Date Written: January 2008
This paper evaluates the performance, bias, and the efficiency of option-implied, and return-based correlation measures using twelve years of daily data on foreign exchange and over-the-counter (OTC) currency option. The sample includes five years of rates for the Polish zloty and the Czech koruna with respect to the euro and the U.S. dollar. The results show that implied correlation is a good predictor of realized correlation and is, generally, unbiased and efficient.
Keywords: Foreign exchange implied correlation, forecasting bias, correlation risk premium
JEL Classification: F31, F37, G15, E58
Suggested Citation: Suggested Citation