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Predicting Volatility in the Foreign Exchange Market
Author(s) -
JORION PHILIPPE
Publication year - 1995
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1995.tb04793.x
Subject(s) - volatility (finance) , econometrics , futures contract , economics , currency , implied volatility , foreign exchange , realized variance , volatility swap , volatility smile , foreign exchange market , stochastic volatility , forward volatility , predictive power , financial economics , monetary economics , philosophy , epistemology
Measures of volatility implied in option prices are widely believed to be the best available volatility forecasts. In this article, we examine the information content and predictive power of implied standard deviations (ISDs) derived from Chicago Mercantile Exchange options on foreign currency futures. The article finds that statistical time‐series models, even when given the advantage of “ex post” parameter estimates, are outperformed by ISDs. ISDs, however, also appear to be biased volatility forecasts. Using simulations to investigate the robustness of these results, the article finds that measurement errors and statistical problems can substantially distort inferences. Even accounting for these, however, ISDs appear to be too variable relative to future volatility.