Cause-and-effect between implied volatility and options price

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

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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 / Department / School: Historic - Faculty of Business - School of Accounting, Economics and Finance
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 : 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 Objective: 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

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