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| Author: | Della Corte, P. Sarno, L. Tsiakas, I. |
| Title: | Spot and forward volatility in foreign exchange |
| Journal: | Journal of Financial Economics
2011 : JUN, VOL. 100:3 p. 496-513 |
| Index terms: | finance bias speculation foreign exchange volatility currency |
| Language: | eng |
| Abstract: | This research paper examines the empirical relation between spot and forward implied volatility (herein as: vol.) in foreign exchange. The paper formulates and tests the forward vol. unbiasedness hypothesis, which is the vol. analogue to the extensively researched hypothesis of unbiasedness in forward exchange rates. It uses a new data set of spot implied vol. quoted on over-the-counter (OTC) currency options. It is found that forward implied vol. is a systematically biased predictor that overestimates future spot implied vol. The bias in forward vol. generates high economic value to an investor exploiting predictability in the returns to vol. speculation, indicating the presence of predictable vol. term premiums in foreign exchange. |
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