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Forecasting Exchange Rate Volatility in the Presence of Jumps

Publikation: Working paper/Preprint Working paperForskning

  • Afdeling for Virksomhedsledelse
We study measures of foreign exchange rate volatility based on high-frequency (5-minute) $/DM exchange rate returns using recent nonparametric statistical techniquesto compute realized return volatility and its separate continuous sample path and jumpcomponents, and measures based on prices of exchange rate futures options, allowingcalculation of option implied volatility. We find that implied volatility is an informationallyefficient but biased forecast of future realized exchange rate volatility. Furthermore,we show that log-normality is an even better distributional approximation for impliedvolatility than for realized volatility in this market. Finally, we show that the jump componentof future realized exchange rate volatility is to some extent predictable, and thatoption implied volatility is the dominant forecast of the future jump component.
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider37
StatusUdgivet - 2006

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