Can Short-Term Foreign Exchange Volatility Be Predicted by the Global Hazard Index?

ECB Working Paper No. 66

50 Pages Posted: 29 Dec 2000

See all articles by Vincent Brousseau

Vincent Brousseau

European Central Bank, Directorate General Economics

Fabio Scacciavillani

Goldman Sachs - Economics Research Department

Date Written: October 2000

Abstract

This paper examines the predictive properties of risk indicators for the foreign exchange markets. In particular it considers the predictive properties of historical volatilities and implied volatilities for movements in various bilateral exchange rates and compares them with the analogous properties of a composite indicator of risk, the Global Hazard Index (GHI). The GHI is a function of the implied volatility derived from currency options on the three major exchange rates, i.e. the euro-US dollar, the US dollar-yen and the euro-yen. For the empirical analysis this paper employs the concept of kernel volatility, which, loosely speaking, expresses the volatility of one variable conditional on the level of another. Simple regressions show that the levels of all the indicators on a particular day have a strong link to the variance of the nominal bilateral exchange rate on the next day. A strong overall influence is displayed by the GHI, especially for the currencies of small open economies.

Keywords: Exchange rates, currency options, market turbulence, implied volatility, risk, forecasting

JEL Classification: F01, F31

Suggested Citation

Brousseau, Vincent and Scacciavillani, Fabio, Can Short-Term Foreign Exchange Volatility Be Predicted by the Global Hazard Index? (October 2000). ECB Working Paper No. 66, Available at SSRN: https://ssrn.com/abstract=247473

Vincent Brousseau (Contact Author)

European Central Bank, Directorate General Economics ( email )

Kaiserstrasse 29
Frankfurt am Main, 60311
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Fabio Scacciavillani

Goldman Sachs - Economics Research Department ( email )

Peterborough Court
133 Fleet Street
London, EC4A 2BB
United Kingdom
+44 20 755 25254 (Phone)

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