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Predictable dynamics in implied volatility surfaces from OTC currency options

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Predictable dynamics in implied volatility surfaces from OTC currency options. / Chalamandaris, Georgios; Tsekrekos, Andrianos.

In: Journal of Banking and Finance, Vol. 34, No. 6, 06.2010, p. 1175-1188.

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Chalamandaris, Georgios ; Tsekrekos, Andrianos. / Predictable dynamics in implied volatility surfaces from OTC currency options. In: Journal of Banking and Finance. 2010 ; Vol. 34, No. 6. pp. 1175-1188.

Bibtex

@article{0958cc1cfaa940ac889eafb423dbd2d4,
title = "Predictable dynamics in implied volatility surfaces from OTC currency options",
abstract = "Recent empirical studies report predictable dynamics in the volatility surfaces that are implied by observed index option prices, such as those prescribed by general equilibrium models. Using an extensive data set from the over-the-counter options market, we document similar predictability in the factors that capture the daily variation of surfaces implied by options on 25 different foreign exchange rates. We proceed to demonstrate that simple vector autoregressive specifications for the factors can help produce accurate out-of-sample forecasts of the systematic component of the surface at short horizons. Profitable delta-hedged positions can be set up based on these forecasts; however, profits disappear when typical transaction costs are taken into account and when trading rules on wide segments of the surface are sought.",
keywords = "implied volatility surfaces, static factor model, forecasting",
author = "Georgios Chalamandaris and Andrianos Tsekrekos",
year = "2010",
month = "6",
doi = "10.1016/j.jbankfin.2009.11.014",
language = "English",
volume = "34",
pages = "1175--1188",
journal = "Journal of Banking and Finance",
issn = "0378-4266",
publisher = "Elsevier",
number = "6",

}

RIS

TY - JOUR

T1 - Predictable dynamics in implied volatility surfaces from OTC currency options

AU - Chalamandaris, Georgios

AU - Tsekrekos, Andrianos

PY - 2010/6

Y1 - 2010/6

N2 - Recent empirical studies report predictable dynamics in the volatility surfaces that are implied by observed index option prices, such as those prescribed by general equilibrium models. Using an extensive data set from the over-the-counter options market, we document similar predictability in the factors that capture the daily variation of surfaces implied by options on 25 different foreign exchange rates. We proceed to demonstrate that simple vector autoregressive specifications for the factors can help produce accurate out-of-sample forecasts of the systematic component of the surface at short horizons. Profitable delta-hedged positions can be set up based on these forecasts; however, profits disappear when typical transaction costs are taken into account and when trading rules on wide segments of the surface are sought.

AB - Recent empirical studies report predictable dynamics in the volatility surfaces that are implied by observed index option prices, such as those prescribed by general equilibrium models. Using an extensive data set from the over-the-counter options market, we document similar predictability in the factors that capture the daily variation of surfaces implied by options on 25 different foreign exchange rates. We proceed to demonstrate that simple vector autoregressive specifications for the factors can help produce accurate out-of-sample forecasts of the systematic component of the surface at short horizons. Profitable delta-hedged positions can be set up based on these forecasts; however, profits disappear when typical transaction costs are taken into account and when trading rules on wide segments of the surface are sought.

KW - implied volatility surfaces

KW - static factor model

KW - forecasting

U2 - 10.1016/j.jbankfin.2009.11.014

DO - 10.1016/j.jbankfin.2009.11.014

M3 - Journal article

VL - 34

SP - 1175

EP - 1188

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

IS - 6

ER -