Premium
The interrelation of price volatility and trading volume of currency options
Author(s) -
Sarwar Ghulam
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10078
Subject(s) - volatility swap , economics , volatility smile , volatility (finance) , implied volatility , currency , forward volatility , liberian dollar , financial economics , volatility risk premium , exchange rate , monetary economics , econometrics , finance
This article examines the interrelations between future volatility of the U.S. dollar/British poundexchange rate and trading volume of currency options for the British pound. The future volatility of theexchange rate is approximated alternatively by implied volatility and by IGARCH volatility. The results suggestthe presence of strong contemporaneous positive feedbacks between the exchange rate volatility and the tradingvolume of call and put options. Previous option volumes have significant predictive power with respect to theexpected future volatility of the dollar/pound exchange rate. Similarly, lagged volatilities jointly havesignificant predictive power for option volume. Although option volume (volatility) responds somewhatdifferently to individual volatility (volume) terms under the two volatility measures, the overallvolume‐volatility relations are broadly similar between the implied and IGARCH volatilities. The resultsgenerally support the hypothesis that the information‐based trading explains more of the trading volumein currency options on the U.S. dollar/British pound exchange rate than hedging. © 2003 WileyPeriodicals, Inc. Jrl Fut Mark 23:681–700, 2003