Stochastic Skew in Currency Options

Peter Carr and Liuren Wu ()
Additional contact information
Peter Carr: New York University & Bloomberg

Finance from EconWPA

Abstract: We document the behavior of over-the-counter currency option prices across moneyness, maturity, and calendar time on two of the most actively traded currency pairs over the past eight years. We find that the risk-neutral distribution of currency returns is relatively symmetric on average. However, on any given date, the conditional currency return distribution can show strong asymmetry. This asymmetry varies greatly over time and often switch directions. We design and estimate a class of models that capture these unique features of the currency options prices and perform much better than traditional jump- diffusion stochastic volatility models.

Keywords: currency options; stochastic skew; time-changed Levy processes (search for similar items in EconPapers)
JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-rmg
Date: 2004-09-07
Note: Type of Document - pdf; pages: 64
View list of references View citations in EconPapers

Downloads: (external link)
http://129.3.20.41/eps/fin/papers/0409/0409014.pdf (application/pdf)

Related works:
Journal Article: Stochastic skew in currency options (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0409014

Access Statistics for this paper

More papers in Finance from EconWPA
Series data maintained by EconWPA ().