The Information Content of Over-the-Counter Currency Options

52 Pages Posted: 1 Dec 2004

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Stefano Mazzotta

Kennesaw State University - Michael J. Coles College of Business

Date Written: June 2004

Abstract

Financial decision makers often consider the information in currency option valuations when making assessments about future exchange rates. The purpose of this paper is to systematically assess the quality of option based volatility, interval and density forecasts. We use a unique dataset consisting of over 10 years of daily data on over-the-counter currency option prices. We find that the OTC implied volatilities explain a much larger share of the variation in realized volatility than previously found using market-traded options. Finally, we find that wide-range interval and density forecasts are often misspecified whereas narrow-range interval forecasts are well specified.

Keywords: FX, volatility, interval, density, forecasting

JEL Classification: G13, G14, C22, C53

Suggested Citation

Christoffersen, Peter and Mazzotta, Stefano, The Information Content of Over-the-Counter Currency Options (June 2004). ECB Working Paper No. 366. Available at SSRN: https://ssrn.com/abstract=533126

Peter Christoffersen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Stefano Mazzotta

Kennesaw State University - Michael J. Coles College of Business ( email )

560 Parliament Garden Way
Kennesaw, GA 30144
United States
(470) 578-6341 (Phone)
(470) 578-9022 (Fax)

HOME PAGE: http://www.mazzotta.info

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