From Currency Volatilities to Global Equity Correlations

67 Pages Posted: 14 May 2019

See all articles by Brice V. Dupoyet

Brice V. Dupoyet

Florida International University - College of Business Administration - Finance

Ali Parhizgari

Florida International University

Antonio Figueiredo

Nova Southeastern University

Date Written: March 19, 2019

Abstract

We derive and empirically test a theoretical link between exchange rate volatility and global equity correlations. Starting with option-implied currency volatilities, we use variants of existing currency models, global capital flows, international parity, the Taylor rule, and some simplifying assumptions to theoretically link foreign exchange options-implied volatilities and future global equity correlations. Using data from January 1999 to June 2015, we test our hypothesis and find that exchange rate implied volatilities — coupled with one-period ex-post correlations — more accurately predict subsequent equity market correlations than other models. Our findings have implications for portfolio diversification, forecast of overall equity portfolio volatility, and portfolio optimization.

Keywords: Exchange Rate, Volatility, International Equity, Correlations

JEL Classification: C32, E44, E47, G15

Suggested Citation

Dupoyet, Brice and Parhizgari, Ali and Figueiredo, Antonio, From Currency Volatilities to Global Equity Correlations (March 19, 2019). Available at SSRN: https://ssrn.com/abstract=3355787 or http://dx.doi.org/10.2139/ssrn.3355787

Brice Dupoyet (Contact Author)

Florida International University - College of Business Administration - Finance ( email )

University Park, RB 209 A
11200 SW 8th Street
Miami, FL 33199
United States
305-348-3328 (Phone)
305-348-4245 (Fax)

Ali Parhizgari

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Antonio Figueiredo

Nova Southeastern University ( email )

3301 College Avenue
Ft. Lauderdale, FL 33314
United States

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