Predicting Volatility in the Foreign Exchange Market

Posted: 4 May 2000  

Philippe Jorion

University of California, Irvine - Paul Merage School of Business

Abstract

Measures of volatility implied in option prices are widely believed to be the best available volatility forecasts. In this paper, we examine the information content and predictive power of Implied Standard Deviations (ISD's) derived from CME options on foreign currency futures. The paper finds that statistical time- series models, even when given the advantage of "ex post" parameter estimates, are outperformed by ISD's. ISD's, however, also appear to be biased volatility forecasts. Using simulations to investigate the robustness of these results, the paper finds that measurement errors and statistical problems can substantially distort inferences. Even accounting for these, however, ISD's appear to be too variable relative to future volatility.

JEL Classification: F31

Suggested Citation

Jorion, Philippe, Predicting Volatility in the Foreign Exchange Market. JOURNAL OF FINANCE, Vol 50 No 2, June 1995. Available at SSRN: https://ssrn.com/abstract=6117

Philippe Jorion (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Campus Drive
Irvine, CA 92697-3125
United States
949-824-5245 (Phone)
949-824-8469 (Fax)

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