Does Statistical Dependence Matter? Evidence from the USD/AUD

Craig A. Ellis

A chapter in Asia Pacific Financial Markets in Comparative Perspective: Issues and Implications for the 21st Century, 2005, pp 53-72 from Emerald Group Publishing Limited

Abstract: This study investigates the effect of volatility scaling on valuing financial assets by examining the long-term return properties of the spot USD/AUD. Tests are conducted for evidence of a scaling law in USD/AUD returns. The economic implications of dependence and non-normality of the distribution of returns are explored using the Garman and Kohlhagen modified Black–Scholes model for valuing foreign currency options. The results suggest that the USD/AUD does not conform to a stable distribution and that as a result of differential scaling laws, Garman and Kohlhagen option values using implied annual volatility will be consistently too high or too low.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:eme:csefzz:s1569-3759(05)86003-6

DOI: 10.1016/S1569-3759(05)86003-6

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