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Implied volatility smirk in the Australian dollar market
Author(s) -
Stuart Connor J.A.,
Gehricke Sebastian A.,
Zhang Jin E.,
Ruan Xinfeng
Publication year - 2021
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12741
Subject(s) - implied volatility , liberian dollar , volatility (finance) , equity (law) , economics , currency , monetary economics , downside risk , financial economics , volatility smile , financial crisis , convexity , econometrics , finance , macroeconomics , portfolio , political science , law
This is the first paper to study the options written on the Invesco Currency Shares Australian Dollar Trust (FXA) exchange‐traded fund (ETF). We quantify the empirical characteristics of the FXA option implied volatility (IV) curve showing that it exhibits a smirk shape, as in US equity options, and the curves become more negatively sloped and exhibit more convexity as the time to maturity increases. During the Global Financial Crisis (GFC) period and a bullish period, IV dramatically increased and the slope became even steeper across all maturities indicating that downside insurance is relatively expensive. Further, the information in the quantified IV curve factors has some predictive power for monthly FXA returns.