Testing the forward volatility unbiasedness hypothesis in exchange rates under long-range dependence

Jorge Pérez-Rodríguez (), Julián Andrada-Félix and Heiko Rachinger

The North American Journal of Economics and Finance, 2021, vol. 57, issue C

Abstract: This paper analyses the unbiasedness hypothesis between spot and forward volatility, using both the actual and the continuous path of realised volatility, and focusing on long-memory properties. For this purpose, we use daily realised volatility with jumps for the USD/EUR exchange rate negotiated in the FX market and employ fractional integration and cointegration techniques. Both series have long-range dependence, and so does the error correction term of their long-run relationship. Hence, deviations from equilibrium are highly persistent, and the effects of shocks affecting the long-run relationship dissipate very slowly. While for long-term contracts, there is some empirical evidence that the forward volatility unbiasedness hypothesis does not hold – and, thus, that forward implied volatility is a systematically downward-biased predictor of future spot volatility – for short-term contracts, the evidence is mixed.

Keywords: Exchange rates; Forward volatility unbiasedness hypothesis; Fractional cointegration (search for similar items in EconPapers)
JEL-codes: C53 C58 F31 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:57:y:2021:i:c:s106294082100067x

DOI: 10.1016/j.najef.2021.101438

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