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The Intertemporal Relationship Between the Currency Spot Market and the Currency Option Market
Author(s) -
Pan MingShiun,
Hocking Ralph T.,
Rim Hong K.
Publication year - 1996
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00081
Subject(s) - currency , economics , foreign exchange market , foreign exchange risk , foreign exchange swap , monetary economics , financial economics , devaluation
This study examines the lead/lag relationship between currency option and currency spot markets for the Deutsche mark and the Japanese yen. Using intraday currency option transactions data for the year 1989 and applying a European type currency option pricing model, pair data series of the implied and the observed exchange rates are compiled. Causality tests are then employed to test the causal relation between the observed and the implied exchange rate changes. The results indicate that the currency spot market leads the currency option market by about ninety minutes.