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The correlation structure of FX option markets before and since the financial crisis

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The correlation structure of FX option markets before and since the financial crisis. / Chalamandaris, Georgios; Tsekrekos, Andrianos.

In: Applied Financial Economics, Vol. 20, No. 1-2, 2010, p. 73-84.

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Chalamandaris, Georgios ; Tsekrekos, Andrianos. / The correlation structure of FX option markets before and since the financial crisis. In: Applied Financial Economics. 2010 ; Vol. 20, No. 1-2. pp. 73-84.

Bibtex

@article{478db7684a2f40a8a08bafc27fcfd928,
title = "The correlation structure of FX option markets before and since the financial crisis",
abstract = "The liquidity crunch and the ensuing financial crisis have unambiguously affected all national economies and global currency exchange rates. In this article we ask whether the cross-currency correlation structure has changed since 2007. Using an extensive set of volatility surfaces implied from over-the-counter options on 11 different exchange rates, as well as recent advances in static and dynamic factor models, we are able to show that the number of factors that innovate the correlation structure has not changed in the last two and a half years. It is the volatility, the persistence and the significance of global systematic factors, vis-{\`a}-vis regional or economy-specific ones, that appear to have changed dramatically. The implications for the risk management of currency exposures and for the predictability of exchange rate volatility are also outlined.",
author = "Georgios Chalamandaris and Andrianos Tsekrekos",
year = "2010",
doi = "10.1080/09603100903262525",
language = "English",
volume = "20",
pages = "73--84",
journal = "Applied Financial Economics",
issn = "0960-3107",
publisher = "Routledge",
number = "1-2",

}

RIS

TY - JOUR

T1 - The correlation structure of FX option markets before and since the financial crisis

AU - Chalamandaris, Georgios

AU - Tsekrekos, Andrianos

PY - 2010

Y1 - 2010

N2 - The liquidity crunch and the ensuing financial crisis have unambiguously affected all national economies and global currency exchange rates. In this article we ask whether the cross-currency correlation structure has changed since 2007. Using an extensive set of volatility surfaces implied from over-the-counter options on 11 different exchange rates, as well as recent advances in static and dynamic factor models, we are able to show that the number of factors that innovate the correlation structure has not changed in the last two and a half years. It is the volatility, the persistence and the significance of global systematic factors, vis-à-vis regional or economy-specific ones, that appear to have changed dramatically. The implications for the risk management of currency exposures and for the predictability of exchange rate volatility are also outlined.

AB - The liquidity crunch and the ensuing financial crisis have unambiguously affected all national economies and global currency exchange rates. In this article we ask whether the cross-currency correlation structure has changed since 2007. Using an extensive set of volatility surfaces implied from over-the-counter options on 11 different exchange rates, as well as recent advances in static and dynamic factor models, we are able to show that the number of factors that innovate the correlation structure has not changed in the last two and a half years. It is the volatility, the persistence and the significance of global systematic factors, vis-à-vis regional or economy-specific ones, that appear to have changed dramatically. The implications for the risk management of currency exposures and for the predictability of exchange rate volatility are also outlined.

U2 - 10.1080/09603100903262525

DO - 10.1080/09603100903262525

M3 - Journal article

VL - 20

SP - 73

EP - 84

JO - Applied Financial Economics

JF - Applied Financial Economics

SN - 0960-3107

IS - 1-2

ER -