Information content of cross‐sectional option prices: A comparison of alternative currency option pricing models on the Japanese yen

Brice Dupoyet

Journal of Futures Markets, 2006, vol. 26, issue 1, 33-59

Abstract: This article implements a currency option pricing model for the general case of stochastic volatility, stochastic interest rates, and jumps in an attempt to reconcile levels of risk‐neutral skewness and kurtosis with observed option prices on the Japanese yen and to analyze the information content of the cross section of option prices by investigating the hedging and pricing performance of various currency option pricing models. The study makes use of both a method of moments and a more traditional generalized‐least‐squares (GLS) estimation technique, taking advantage of the fact that methods of moments do not specifically require the use of cross‐sectional option prices, whereas GLS does. Results centered around the Asia economic crisis of 1997 and 1998 indicate that the cross section of option prices surprisingly does not appear to contain superior information as the two estimation techniques yield relatively similar results once idiosyncratic differences between them are acknowledged. Extensions of the G. Bakshi, C. Cao, and Z. Chen (1997) results to currencies are also provided. © 2006Wiley Periodicals, Inc. Jrl Fut Mark 26:33–59, 2006

Date: 2006
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