Predicting nominal exchange rate movements using skewness information from options prices

Ryan Ratcliff
Additional contact information
Ryan Ratcliff: University of San Diego, USA, Postal: University of San Diego, USA

International Journal of Finance & Economics, 2010, vol. 15, issue 1, 75-92

Abstract: This paper uses a measure of the relative price of out-of-the-money (OTM) European put and call currency options to forecast daily movements in the dollar|euro exchange rate over the period of January 2002-June 2004. As these OTM options are pure bets on future movements of the exchange rate, their relative price contains information about the market's estimate of the relative probabilities of appreciation or depreciation of the euro over the life of the options. Forecasts that include the relative price of the OTM options offer significantly better out-of-sample predictions of tomorrow's exchange rate than either the simple random walk or an interest rate parity model. These results offer new insight into the puzzle of the day-to-day volatility of currency prices that should be driven by slow-moving macro fundamentals. Copyright © 2009 John Wiley & Sons, Ltd.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1002/ijfe.393 Link to full text; subscription required (text/html)

Related works:
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: https://EconPapers.repec.org/RePEc:ijf:ijfiec:v:15:y:2010:i:1:p:75-92

Ordering information: This journal article can be ordered from
http://jws-edcv.wile ... PRINT_ISSN=1076-9307

DOI: 10.1002/ijfe.393

Access Statistics for this article

International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley-Blackwell Digital Licensing () and Christopher F. Baum ().