Predictability of Implied Volatility: Evidence from the Over-the-counter Currency Option Markets

Alfred Wong, Richard Heaney, Amalia Di Iorio

Research output: Working paper

Abstract

This paper provides an empirical study on the predictability of implied volatility using dataset collected from the London over-the-counter currency option market. The present work is motivated by the lack of empirical studies that address implied volatility characteristics across various maturities. We applied both in and out-of-sample tests that include the nonparametric variance ratio and interval forecasts methodologies. Contrary to the weak-form market efficiency theory, this study provides evidence of non-random movement in the implied volatility series and indicates predictability of implied volatility series. The result suggests that there is a need to account for the differences in data characteristics that exist across the volatility term structure.
Original languageEnglish
DOIs
Publication statusPublished - 2011

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Options markets
Implied volatility
Currency options
Predictability
Empirical study
Volatility term structure
Weak-form market efficiency
Interval forecasts
Maturity
Methodology
Variance ratio

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Wong, Alfred ; Heaney, Richard ; Di Iorio, Amalia. / Predictability of Implied Volatility: Evidence from the Over-the-counter Currency Option Markets. 2011.
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Wong, A, Heaney, R & Di Iorio, A 2011 'Predictability of Implied Volatility: Evidence from the Over-the-counter Currency Option Markets'. https://doi.org/10.2139/ssrn.1917062

Predictability of Implied Volatility: Evidence from the Over-the-counter Currency Option Markets. / Wong, Alfred; Heaney, Richard; Di Iorio, Amalia.

2011.

Research output: Working paper

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T1 - Predictability of Implied Volatility: Evidence from the Over-the-counter Currency Option Markets

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AU - Heaney, Richard

AU - Di Iorio, Amalia

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N2 - This paper provides an empirical study on the predictability of implied volatility using dataset collected from the London over-the-counter currency option market. The present work is motivated by the lack of empirical studies that address implied volatility characteristics across various maturities. We applied both in and out-of-sample tests that include the nonparametric variance ratio and interval forecasts methodologies. Contrary to the weak-form market efficiency theory, this study provides evidence of non-random movement in the implied volatility series and indicates predictability of implied volatility series. The result suggests that there is a need to account for the differences in data characteristics that exist across the volatility term structure.

AB - This paper provides an empirical study on the predictability of implied volatility using dataset collected from the London over-the-counter currency option market. The present work is motivated by the lack of empirical studies that address implied volatility characteristics across various maturities. We applied both in and out-of-sample tests that include the nonparametric variance ratio and interval forecasts methodologies. Contrary to the weak-form market efficiency theory, this study provides evidence of non-random movement in the implied volatility series and indicates predictability of implied volatility series. The result suggests that there is a need to account for the differences in data characteristics that exist across the volatility term structure.

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M3 - Working paper

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Wong A, Heaney R, Di Iorio A. Predictability of Implied Volatility: Evidence from the Over-the-counter Currency Option Markets. 2011. https://doi.org/10.2139/ssrn.1917062

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