Does Option-Implied Cross-Sectional Return Dispersion Forecast Realized Cross-Sectional Return Dispersion? Evidence from the G10 Currencies

31 Pages Posted: 17 Oct 2015 Last revised: 26 May 2016

See all articles by Klaus Grobys

Klaus Grobys

University of Vaasa; University of Jyväskyla

Jari-Pekka Heinonen

University of Vaasa - Department of Accounting and Finance

Date Written: May 24, 2016

Abstract

This study employs option-price data to back out the implied cross-sectional return variance in the G10 currencies. It investigates the relation of implied cross-sectional return dispersion in the currency market and subsequent realized cross-sectional return dispersion. We find that implied cross-sectional return variance, based on option-price data with one-month and three-month maturity, outperforms past cross-sectional return variance in forecasting future cross-sectional return variance.

Keywords: Return dispersion, currency markets, G10 currencies, implied cross-sectional return dispersion

JEL Classification: G21, G14

Suggested Citation

Grobys, Klaus and Heinonen, Jari-Pekka, Does Option-Implied Cross-Sectional Return Dispersion Forecast Realized Cross-Sectional Return Dispersion? Evidence from the G10 Currencies (May 24, 2016). Available at SSRN: https://ssrn.com/abstract=2675080 or http://dx.doi.org/10.2139/ssrn.2675080

Klaus Grobys (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Wolffintie 34
FIN-65101 Vaasa
Finland

University of Jyväskyla ( email )

Jyväskyla
Finland

Jari-Pekka Heinonen

University of Vaasa - Department of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland

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