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Published (Version of Record)CC BY V4.0, Open Access
Journal article
Does currency smirk predict foreign exchange return?
Investment Management and Financial Innovations, Vol.17(3), pp.219-230
2020
Abstract
This study examines the predictive power of implied volatility smirk to forecast foreign exchange (FX) return. The volatility smirk contains critical information, especially when the market experiences negative news. The Australian dollar, Canadian dollar, Swiss franc, Euro, and British pound options traded in the opening, midday and closing periods of the trading day are selected to estimate the currency smirk. Research results reveal that the currency smirk outperforms in forecasting FX returns. In addition, the steeper slope in the middle of the trading day suggests that the predictive power of currency smirk in the midday period is higher compared to the opening and closing periods. However, currency smirks’ predictability lasts for a short period, as the FX market is highly adept at incorporating the vital information embedded in the currency smirk. These findings imply that the currency smirk is distinctive for forecasting very short-term FX fluctuations, and the day- or overnight FX traders can use its uniqueness to profit from quick price swings in the 24-hour global FX market.
Details
- Title
- Does currency smirk predict foreign exchange return?
- Authors/Creators
- A. Hoque (Author/Creator) - Murdoch UniversityT. Ngoc Quynh Le (Author/Creator)K. Hassan (Author/Creator) - Murdoch University
- Publication Details
- Investment Management and Financial Innovations, Vol.17(3), pp.219-230
- Publisher
- Business Perspectives
- Identifiers
- 991005543727607891
- Copyright
- © 2020 The Author(s).
- Murdoch Affiliation
- Murdoch Business School; College of Business
- Language
- English
- Resource Type
- Journal article
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