Foreign Exchange Market Volatility Information: An Investigation of Real-Dollar Exchange Rate

Frederico Gomes, Marcelo Takami and Vinicius Brandi ()

No 174, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Price distributions estimation has become a relevant subject for risk and pricing literature. Special concern resides on tail probabilities, which usually presents more severe observations than those predicted by Normal distributions. This work aims to verify whether the volatility implied in dollar-real options contains useful information about unexpected large-magnitude returns. Implied volatility is also checked as a predictor for realized volatility. Our results indicate that implied volatilities indeed provide useful information on unusual returns and also work as a good predictor for observed volatility. Finally, we implement an early-warning system and implied volatilities seem to signalize large-magnitude returns.

Date: 2008-08
New Economics Papers: this item is included in nep-ifn and nep-mst
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