Implied betas for the Frankel–Wei regression framework

Michael Kunkler

Economics Letters, 2022, vol. 218, issue C

Abstract: The Frankel–Wei regression framework measures the relationship between one currency and another currency solely by using foreign exchange rates as regression variables, where investors choose a common numéraire for the foreign exchange rates. When the common numéraire is a single currency, the foreign exchange rates are bilateral exchange rates. Option implied volatilities are easily estimated from listed option prices for bilateral exchange rates. In this paper, we use the implied volatilities to estimate implied betas for the Frankel–Wei regression framework. We show that the average beta and the average implied beta are both exactly 0.5, for each currency in a system of currencies.

Keywords: Exchange rates; Implied volatilities; Implied betas (search for similar items in EconPapers)
JEL-codes: F31 G15 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:218:y:2022:i:c:s0165176522002713

DOI: 10.1016/j.econlet.2022.110758

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