Cross-dynamics of volatility term structures implied by foreign exchange options

Elizaveta Krylova, Jussi Nikkinen and Sami Vähämaa

Journal of Economics and Business, 2009, vol. 61, issue 5, pages 355-375

Abstract: This paper examines the cross-dynamics of volatility term structure slopes implied by foreign exchange options. The empirical findings demonstrate that a few principal components can explain a vast proportion of the variation in volatility term structure slopes across the major exchange rates. Furthermore, the results indicate that the euro is the dominant currency, as the implied volatility term structure of the euro is found to affect all the other volatility term structures, while the term structure of the euro appears to be virtually unaffected by the other currencies. Finally, our results provide evidence of significant nonlinearities in the relationship between the euro and the Swiss franc.

Keywords: Implied; volatility; Volatility; term; structure; Foreign; exchange; options (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:jebusi:v:61:y::i:5:p:355-375

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