Foreign Exchange, Fractional Cointegration and the Implied-Realised Volatility Relation

26 Pages Posted: 4 Mar 2005

See all articles by Neil Kellard

Neil Kellard

University of Essex - Essex Business School

Christian Dunis

John Moores University - Business School

Nicholas Sarantis

London Metropolitan University - Department of Economics, Finance and International Business (EFIB)

Date Written: March 2005

Abstract

Almost all relevant literature has characterised implied volatility as a conditionally biased predictor of realised volatility. This paper applies new time series techniques to assess the validity of this finding within a foreign exchange market context. The results are striking; it is shown that implied and realised volatility are fractionally cointegrated with a slope coefficient of unity. Furthermore, the non-standard asymptotic distribution of estimators when using fractionally integrated data, is circumvented by forming a novel quasi-error correction model; standard tests then allow us to show that, in fact, implied volatility is not conditionally biased.

Keywords: market efficiency, traded volatility, fractional cointegration

JEL Classification: C14, C22, F31, G14

Suggested Citation

Kellard, Neil and Dunis, Christian and Sarantis, Nicholas, Foreign Exchange, Fractional Cointegration and the Implied-Realised Volatility Relation (March 2005). Available at SSRN: https://ssrn.com/abstract=676118 or http://dx.doi.org/10.2139/ssrn.676118

Neil Kellard (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom
+44-1206-87-4153 (Phone)

Christian Dunis

John Moores University - Business School ( email )

John Foster Building
98 Mount Pleasant
Liverpool, L3 5UZ
United Kingdom

Nicholas Sarantis

London Metropolitan University - Department of Economics, Finance and International Business (EFIB) ( email )

Economics Subject Group, LMBS
London EC2M 6SQ, EC2M 6SQ
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
135
Abstract Views
3,235
PlumX Metrics