Hoque, Ariful (2010) Cause-and-effect between implied volatility and options price. Academy of Taiwan Business Management Review , 6 (3). pp. 111-117. ISSN 1813-0534
Abstract
Implied volatility is widely believed to be the best underlying exchange rate volatility forecast for pricing currency options. To measure unbiased implied volatility requires accurate options price. Unbiased implied volatility is also needed for pricing options correctly. Consequently, an interesting question is raised, is it options price that causes the implied volatility or is it the implied volatility that causes options price? This study employs the Granger causality test to address this critical issue for six major currency options are traded in Philadelphia Stock Exchange. The test results identify the bilateral Granger causality between implied volatility and options price, which distorts options pricing accuracy. We, therefore, cannot conclude that the implied volatility is the best choice for pricing currency options.
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| Item Type: | Article (Commonwealth Reporting Category C) |
|---|---|
| Refereed: | Yes |
| Item Status: | Live Archive |
| Additional Information: | Copyright Taiwan Institute of Business Administration. |
| Faculty/School / Institute/Centre: | Historic - Faculty of Business - School of Accounting, Economics and Finance (1 Apr 2007 - 31 Dec 2010) |
| Faculty/School / Institute/Centre: | Historic - Faculty of Business - School of Accounting, Economics and Finance (1 Apr 2007 - 31 Dec 2010) |
| Date Deposited: | 22 Oct 2010 03:06 |
| Last Modified: | 03 Jul 2013 00:03 |
| Uncontrolled Keywords: | implied volatility; currency options price; Granger causality test; MATLAB; bilateral causality |
| Fields of Research (2008): | 15 Commerce, Management, Tourism and Services > 1502 Banking, Finance and Investment > 150201 Finance 14 Economics > 1402 Applied Economics > 140210 International Economics and International Finance 14 Economics > 1403 Econometrics > 140303 Economic Models and Forecasting |
| Socio-Economic Objectives (2008): | B Economic Development > 90 Commercial Services and Tourism > 9001 Financial Services > 900101 Finance Services E Expanding Knowledge > 97 Expanding Knowledge > 970115 Expanding Knowledge in Commerce, Management, Tourism and Services |
| URI: | http://eprints.usq.edu.au/id/eprint/8764 |
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