Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/67763
Authors: 
Busch, Thomas
Christensen, Bent Jesper
Nielsen, Morten Ørregaard
Year of Publication: 
2005
Series/Report no.: 
Queen's Economics Department Working Paper 1187
Abstract: 
We study measures of foreign exchange rate volatility based on high-frequency (5-minute) $/DM exchange rate returns using recent nonparametric statistical techniques to compute realized return volatility and its separate continuous sample path and jump components, and measures based on prices of exchange rate futures options, allowing calculation of option implied volatility. We find that implied volatility is an informationally efficient but biased forecast of future realized exchange rate volatility. Furthermore, we show that log-normality is an even better distributional approximation for implied volatility than for realized volatility in this market. Finally, we show that the jump component of future realized exchange rate volatility is to some extent predictable, and that option implied volatility is the dominant forecast of the future jump component.
Subjects: 
bipower variation
currency options
exchange rates
implied volatility
jumps
realized volatility
JEL: 
C1
F31
G1
Document Type: 
Working Paper

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