Conference paper
Modeling moneyness volatility in measuring exchange rate volatility
IEEE
Proceedings of 2011 IEEE Symposium on Computational Intelligence for Financial Engineering & Economics (Paris, France, 11/04/2011–15/04/2011)
2011
Abstract
The implied volatility (IV) is widely believed to be the best measure of exchange rate volatility. Despite its widespread usage, the IV approach suffers from an obvious chicken-egg problem: obtaining an unbiased IV requires the options to be priced correctly and calculating option prices accurately requires an unbiased IV. We contribute to this literature by developing a new model for exchange rate volatility which we term as the “moneyness volatility (MV)”. Besides eliminating the chicken-egg problem of IV, the MV approach outperforms the IV in forecasting ability in both in-sample and out-of-sample tests. The F-test, Granger-Newbold test and Diebold-Mariano test results consistently reveal that MV outperforms IV in estimating as well as forecasting exchange rate volatility. Furthermore, test results reveal that our approach works well for the six major currency options. Our pioneering approach in modeling exchange rate volatility has far-reaching implications for academicians, professional traders and risk managers.
Details
- Title
- Modeling moneyness volatility in measuring exchange rate volatility
- Authors/Creators
- A. Hoque (Author/Creator) - University of South AustraliaC. Krishnamurti (Author/Creator) - University of Southern Queensland
- Conference
- Proceedings of 2011 IEEE Symposium on Computational Intelligence for Financial Engineering & Economics (Paris, France, 11/04/2011–15/04/2011)
- Publisher
- IEEE
- Identifiers
- 991005542066407891
- Copyright
- © 2011 IEEE
- Murdoch Affiliation
- Murdoch University
- Language
- English
- Resource Type
- Conference paper
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