Predictability of Implied Volatility: Evidence from the Over-the-counter Currency Option Markets

36 Pages Posted: 26 Aug 2011

See all articles by Alfred H.S. Wong

Alfred H.S. Wong

Charles Sturt University

Richard A. Heaney

University of Western Australia

Amalia Di Iorio

La Trobe Business School

Date Written: August 26, 2011

Abstract

This paper provides an empirical study on the predictability of implied volatility using dataset collected from the London over-the-counter currency option market. The present work is motivated by the lack of empirical studies that address implied volatility characteristics across various maturities. We applied both in and out-of-sample tests that include the nonparametric variance ratio and interval forecasts methodologies. Contrary to the weak-form market efficiency theory, this study provides evidence of non-random movement in the implied volatility series and indicates predictability of implied volatility series. The result suggests that there is a need to account for the differences in data characteristics that exist across the volatility term structure.

Keywords: implied volatility, currency option, over-the-counter, market Efficiency

JEL Classification: G10, G12, G13, G14, G17

Suggested Citation

Wong, Alfred H.S. and Heaney, Richard A. and Di Iorio, Amalia, Predictability of Implied Volatility: Evidence from the Over-the-counter Currency Option Markets (August 26, 2011). Available at SSRN: https://ssrn.com/abstract=1917062 or http://dx.doi.org/10.2139/ssrn.1917062

Alfred H.S. Wong (Contact Author)

Charles Sturt University ( email )

Panorama Avenue
Bathurst, NSW 2678
Australia

Richard A. Heaney

University of Western Australia ( email )

Crawley
Perth, Western Australia 6009
Australia
0414700799 (Phone)

Amalia Di Iorio

La Trobe Business School ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

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