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Explanatory factors and causality in the dynamics of volatility surfaces implied from OTC Asian–Pacific currency options

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Explanatory factors and causality in the dynamics of volatility surfaces implied from OTC Asian–Pacific currency options. / Chalamandaris, G.; Tsekrekos, Andrianos.

In: Computational Economics, Vol. 41, No. 3, 03.2013, p. 327-358.

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@article{29f5893468744ec7a3803dfaa0b41349,
title = "Explanatory factors and causality in the dynamics of volatility surfaces implied from OTC Asian–Pacific currency options",
abstract = "Volatility implied from observed option contracts systematically varieswith the contracts{\textquoteright} strike price and time to expiration, giving rise to an instantaneously non-flat implied volatility surface (IVS) that exhibits substantial time variation. We identify a number of latent factors that drive the dynamics of the IVSs from options on 11 Asian–Pacific exchange rates and show that these have a natural interpretation in the law of motion of each surface. We present evidence that these latent factors are related due to their common dependence on exogenous economy-wide variables.Findings suggest that the factors capturing (i) the volatility level of the Japanese yen and the Chinese yuan, (ii) the volatility term structure of the Japanese yen, Taiwanese and Australian dollars and (iii) the risk aversion towards the Australian dollar, Japanese yen and Chinese yuan seem to incorporate first the investors{\textquoteright} expectations regarding the volatility in the region.",
keywords = "implied volatility surfaces, Factor model, Causality",
author = "G. Chalamandaris and Andrianos Tsekrekos",
year = "2013",
month = mar,
doi = "10.1007/s10614-012-9322-2",
language = "English",
volume = "41",
pages = "327--358",
journal = "Computational Economics",
issn = "0927-7099",
publisher = "Springer Netherlands",
number = "3",

}

RIS

TY - JOUR

T1 - Explanatory factors and causality in the dynamics of volatility surfaces implied from OTC Asian–Pacific currency options

AU - Chalamandaris, G.

AU - Tsekrekos, Andrianos

PY - 2013/3

Y1 - 2013/3

N2 - Volatility implied from observed option contracts systematically varieswith the contracts’ strike price and time to expiration, giving rise to an instantaneously non-flat implied volatility surface (IVS) that exhibits substantial time variation. We identify a number of latent factors that drive the dynamics of the IVSs from options on 11 Asian–Pacific exchange rates and show that these have a natural interpretation in the law of motion of each surface. We present evidence that these latent factors are related due to their common dependence on exogenous economy-wide variables.Findings suggest that the factors capturing (i) the volatility level of the Japanese yen and the Chinese yuan, (ii) the volatility term structure of the Japanese yen, Taiwanese and Australian dollars and (iii) the risk aversion towards the Australian dollar, Japanese yen and Chinese yuan seem to incorporate first the investors’ expectations regarding the volatility in the region.

AB - Volatility implied from observed option contracts systematically varieswith the contracts’ strike price and time to expiration, giving rise to an instantaneously non-flat implied volatility surface (IVS) that exhibits substantial time variation. We identify a number of latent factors that drive the dynamics of the IVSs from options on 11 Asian–Pacific exchange rates and show that these have a natural interpretation in the law of motion of each surface. We present evidence that these latent factors are related due to their common dependence on exogenous economy-wide variables.Findings suggest that the factors capturing (i) the volatility level of the Japanese yen and the Chinese yuan, (ii) the volatility term structure of the Japanese yen, Taiwanese and Australian dollars and (iii) the risk aversion towards the Australian dollar, Japanese yen and Chinese yuan seem to incorporate first the investors’ expectations regarding the volatility in the region.

KW - implied volatility surfaces

KW - Factor model

KW - Causality

U2 - 10.1007/s10614-012-9322-2

DO - 10.1007/s10614-012-9322-2

M3 - Journal article

VL - 41

SP - 327

EP - 358

JO - Computational Economics

JF - Computational Economics

SN - 0927-7099

IS - 3

ER -