Topic
Foreign exchange market
About: Foreign exchange market is a research topic. Over the lifetime, 6661 publications have been published within this topic receiving 153384 citations. The topic is also known as: forex & FX.
Papers published on a yearly basis
Papers
More filters
TL;DR: This article examined the information content and predictive power of implied standard deviations (ISDs) derived from Chicago Mercantile Exchange options on foreign currency futures, and found that statistical time-series models, even when given the advantage of "ex post" parameter estimates, are outperformed by ISDs.
Abstract: Measures of volatility implied in option prices are widely believed to be the best available volatility forecasts. In this article, we examine the information content and predictive power of implied standard deviations (ISDs) derived from Chicago Mercantile Exchange options on foreign currency futures. The article finds that statistical time-series models, even when given the advantage of "ex post" parameter estimates, are outperformed by ISDs. ISDs, however, also appear to be biased volatility forecasts. Using simulations to investigate the robustness of these results, the article finds that measurement errors and statistical problems can substantially distort inferences. Even accounting for these, however, ISDs appear to be too variable relative to future volatility. IT IS WIDELY BELIEVED that the volatility implied in option prices is the market's best estimate of future volatility. After all, if it were not, one could devise a trading strategy that could generate profits by identifying mispriced options. The purpose of this article is to investigate the information content and predictive power of volatility implied in options on foreign currencies. The paper focuses on options on currency futures, traded on the Chicago Mercantile Exchange (CME). Because of the depth and liquidity of CME futures and options, traded side-by-side in the same market, implied standard deviations (ISDs) allow for clean tests of the predictive power of implied volatilities. Early studies of the information content of ISDs have generally found that these contain substantial information for future volatility. Latane and Rendleman (1976), Chiras and Manaster (1978), and Beckers (1981), for example, regress future volatility on the weighted implied volatility across a broad sample of Chicago Board Options Exchange (CBOE) stocks, and find that options contain volatility forecasts that are more accurate than historical measures.1 These studies, performed shortly after the 1973 beginning of the CBOE option market, could only use a relatively short time span, and therefore focused on cross-sections rather than time-series predictions.
765 citations
Book•
25 Aug 1987
TL;DR: In this article, Hodrick provides a foundation for developing quantitive measures of risk and expected return in international finance, and provides a framework for quantifying the expected return of international finance.
Abstract: Robert Hodrick provides a foundation for developing quantitive measures of risk and expected return in international finance.
697 citations
TL;DR: In this article, the empirical distribution of returns in the stock market and in the foreign exchange market is compared. And the results are much more significant in theforeign exchange market than in the US stock market, which suggests differences in the structure of these markets.
Abstract: exchange rates exhibit systematic discontinuities, even after allowingfor conditional heteroskedasticity in the diffusion process. The results are much more significant in theforeign exchange market than in the stock market, which suggests differences in the structure of these markets. Finally, this jump component is shown to explain some of the empirically observed mispricings in the currency options market. The objective of this article is to analyze and compare the empirical distribution of returns in the stock market and in the foreign exchange market. There are a number of reasons why a better understanding of the stochastic processes driving prices in these markets would be useful. Many financial models rely heavily on the assumption of a particular stochastic process, while relatively little attention is paid to the empirical fit of the postulated distribution. As a result, models like option pricing models are applied indiscriminately to various markets such as the stock market and the foreign exchange market when the underlying processes may be fundamentally different. The foreign exchange market, for instance, is characterized by active exchange rate man
685 citations
TL;DR: In this paper, the authors used genetic programming techniques to find technical trading rules and found strong evidence of economically significant out-of-sample excess returns to those rules for each of six exchange rates over the period 1981•1995.
Abstract: Using genetic programming techniques to find technical trading rules, we find strong evidence of economically significant out-of-sample excess returns to those rules for each of six exchange rates over the period 1981‐1995. Further, when the dollar/Deutsche mark rules are allowed to determine trades in the other markets, there is significant improvement in performance in all cases, except for the Deutsche mark/yen. Betas calculated for the returns according to various benchmark portfolios provide no evidence that the returns to these rules are compensation for bearing systematic risk. Bootstrapping results on the dollar/Deutsche mark indicate that the trading rules detect patterns in the data that are not captured by standard statistical models.
672 citations
TL;DR: In this article, the theoretical impact of exchange risk on both equilibrium prices and quantities is analyzed for several empirical cases of 1965-1975 U.S. and German trade and it is found that exchange rate uncertainty has had a significant impact on prices but no significant effect on the volume of trade.
671 citations