An E - ARCH Model for the Term Structure ofImplied Volatility of FX
نویسندگان
چکیده
1 We construct a statistical model for the term-structure of implied volatilities of currency options based on daily historical data for 13 currency pairs over a 19-month period. We examine the joint evolution of 1 month, 2 month, 3 month, 6 month and 1 year at-the-money (50) options in all the currency pairs. We show that there exist three uncorrelated state variables (principal components) which account for the parallel movement, slope oscillation, and curvature of the term structure and which explain, on average, the movements of the term-structure of volatility to more than 95% in all cases. We test and construct an exponential ARCH, or E-ARCH, model for each state variable. One of the applications of this model is to produce conndence bands for the term structure of volatility.
منابع مشابه
Inevitability of Losing Most Traders in the Foreign Exchange Market: New Evidence
The foreign exchange market (FX market) accounts for 40% of the total volume of the worldâs e-commerce by its own. Based on statistics, sometimes up to 90 per cent of the traders lose their total capital in this market just within six months to one year and leave this market. The probability of loss in the FX market can be estimated by probability theory. The present paper intends to demonst...
متن کاملEmpirical Implementation of a Term Structure Model with Stochastic Volatility
We provide the empirical implementation of the term-structure model developed in Fornari and Mele (1998). This model is based on a continuous time economy exhibiting equilibrium dynamics to which most asymmetric ARCH models converge in distribution as the sample frequency gets in nite. We obtain estimates of the model’s parameters that are based on an indirect inference scheme in which such con...
متن کاملمدلسازی اجتنابناپذیری زیان اکثریت معاملهگران در بازار فارکس با استفاده از نظریه فرایندهای تصادفی
Foreign exchange (FX) markets play a significant role in the global financial market, so that it comprises 40% of total global e-commerce values. However, reports show a 90% loss of entire investment of traders in this market usually after six to 12 months after entrance. This paper analyzes losing values of the majority of traders theoretically and empirically. Furthermore, by ignoring spread...
متن کاملFX Comovements: Disentangling the Role of Market Factors, Carry-Trades and Idiosyncratic Components
This paper models high and low frequency dynamic components of FX excess return correlations and examines their relationship with economic fundamentals. A factor currency pricing model is used to characterize the correlation structure of FX excess returns. I provide evidence on high levels of comovement in FX markets during the post-crisis (or recovery) period following the 2008 financial turmo...
متن کاملThe Stock Returns Volatility based on the GARCH (1,1) Model: The Superiority of the Truncated Standard Normal Distribution in Forecasting Volatility
I n this paper, we specify that the GARCH(1,1) model has strong forecasting volatility and its usage under the truncated standard normal distribution (TSND) is more suitable than when it is under the normal and student-t distributions. On the contrary, no comparison was tried between the forecasting performance of volatility of the daily return series using the multi-step ahead forec...
متن کامل