Coherent Foreign Exchange Market Models

21 Pages Posted: 23 Jan 2013 Last revised: 23 Jan 2015

See all articles by Alessandro Gnoatto

Alessandro Gnoatto

University of Verona - Department of Economics

Date Written: January 22, 2015

Abstract

A model describing the dynamics of a foreign exchange (FX) rate should preserve the same level of analytical tractability when the inverted FX process is considered. We show that affine stochastic volatility models satisfy such a requirement. Such a finding allows us to use affine stochastic volatility models as a building block for FX dynamics which are functionally-invariant with respect to the construction of suitable products/ratios of rates thus generalizing the model of (De Col et al., 2013).

Keywords: FX Options, foreign-domestic symmetry

JEL Classification: G120, G130

Suggested Citation

Gnoatto, Alessandro, Coherent Foreign Exchange Market Models (January 22, 2015). Available at SSRN: https://ssrn.com/abstract=2205083 or http://dx.doi.org/10.2139/ssrn.2205083

Alessandro Gnoatto (Contact Author)

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

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