The Accuracy of Density Forecasts from Foreign Exchange Options

Posted: 29 Feb 2008

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: 2005

Abstract

Financial decision makers often consider the information in currency option valuations when making assessments about future exchange rates. The purpose of this article is to systematically assess the quality of option-based volatility and density forecasts. We use a unique dataset consisting of more than 10 years of daily data on over-the-counter (OTC) currency option prices. We find that the OTC implied volatilities provide largely unbiased and fairly accurate forecasts of one-month- and three-month-ahead realized volatility. Furthermore, we find that the one-month option implied density forecasts are well calibrated for the center of the distribution, but we find evidence of misspecification in the tail density forecasts.

Keywords: density, forecasting, FX, interval, volatility

Suggested Citation

Christoffersen, Peter and Mazzotta, Stefano, The Accuracy of Density Forecasts from Foreign Exchange Options ( 2005). Journal of Financial Econometrics, Vol. 3, Issue 4, pp. 578-605, 2005. Available at SSRN: https://ssrn.com/abstract=821756

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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