Extracting Market Expectations from Currency Options ’ Risk Reversals
نویسنده
چکیده
Currency option market has developed strongly since breakdown of the Bretton Wood agreement in the early 1970s. Options have begun to be an alternative risk management tool to cope with the high exchange rate volatility. After the stock market crash in 1987 market participants could have observed some new phenomena in option prices. The so-called volatility smile appeared to violate the famous Black–Scholes model [Black, Scholes, 1973]. It is believed that the volatility smile (skew) might have reflected market participants’ fear of another stock market crash [Wang, 2008]. Since that time, many researchers have focused their effort to extract information embedded in option market prices. There are numerous implications of their studies. Options market Pobrane z czasopisma Annales H Oeconomia http://oeconomia.annales.umcs.pl Data: 04/03/2018 00:05:58
منابع مشابه
How do Sudden Stops of Capital Flows Affect Currency Crises in Asia?
Sudden stops can be characterized by sharp reversals in capital inflows, large declines in output, and steep collapses in real asset prices (Mendoza and Smith, 2009). In almost all recent crises, capital account reversals amounting to more than 10% of an afflicted country’s GDP have occurred (Calvo and Reinhart, 1999 and Nabli, 1999). More specifically, reversals in capital flows to emergin...
متن کاملThe risk premium of volatility implicit in currency options
This paper provides an empirical investigation of the risk neutral variance process and the market price of variance risk implied in the foreign currency options market. There are three principal contributions. First, the parameters of Heston's (1993) mean-reverting square root stochastic volatility model are estimated using dollar/mark option prices from 1987 to 1992. Second, it is shown that ...
متن کاملPricing Currency Options Under Stochastic Volatility
This paper investigates the relative pricing performance between constant volatility and stochastic volatility pricing models, based on a comprehensive sample of options on four currencies, including the British pound, Deutsche mark, Japanese yen and Swiss franc, traded frequently in the Philadelphia Stock Exchange (PHLX) from 1994 to 2001. The results show that the model of Heston (1993) outpe...
متن کاملMeasuring Expectations in Options Markets: an Application to the S&p500 Index
ABSTRACT. Extracting market expectations has always been an important issue when making national policies and investment decisions in financial markets. In option markets, the most popular way has been to extract implied volatilities to assess the future variability of the underlying with the use of the Black & Scholes formula. In this manuscript, we propose a novel way to extract the whole tim...
متن کاملThe Enron Bankruptcy: When did the options market in Enron lose it’s smirk?
The Enron Corporation went from a $65 billion dollar market capitalization to bankruptcy in just 16 months. Using statistical techniques for extracting the implied probability distributions built into option prices, I examine the market’s expectation of Enron’s risk of collapse. I find that the options market remained far too optimistic about the stock until just weeks before their bankruptcy f...
متن کامل