Is it Worth Tracking Dollar/Real Implied Volatility?

Sandro Andrade and Benjamin Tabak

No 15, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: In this paper we examine the relation between dollar-real exchange rate volatility implied in option prices and subsequent realized volatility, in the period of February 1999 to June 2000. Our results are in line with recent literature, suggesting that the implied volatility obtained from a simple option-pricing model, although an upward-biased estimator of future volatility does provide information about volatility over the remaining life of the option, which is not present in past returns. Results are robust to the choice of two alternative time series models to explore information embedded in returns, a fixed volatility and a GARCH (1,1) model, even allowing for in-sample forecasts by the GARCH (1,1) model. Results are also robust to the choice of measuring realized volatility in two alternative ways.

Date: 2001-03
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