Implied volatility smirk in the Australian dollar market

Connor J.A. Stuart, Sebastian A. Gehricke, Jin E. Zhang and Xinfeng Ruan

Accounting and Finance, 2021, vol. 61, issue 3, 4573-4599

Abstract: This is the first paper to study the options written on the Invesco Currency Shares Australian Dollar Trust (FXA) exchange‐traded fund (ETF). We quantify the empirical characteristics of the FXA option implied volatility (IV) curve showing that it exhibits a smirk shape, as in US equity options, and the curves become more negatively sloped and exhibit more convexity as the time to maturity increases. During the Global Financial Crisis (GFC) period and a bullish period, IV dramatically increased and the slope became even steeper across all maturities indicating that downside insurance is relatively expensive. Further, the information in the quantified IV curve factors has some predictive power for monthly FXA returns.

Date: 2021
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