Pricing Currency Options with Intra-Daily Implied Volatility
This paper introduces the intra-daily implied volatility (IDIV), a new volatility measure to price currency option accurately. The IDIV is developed based on the implied volatility estimated on equally spaced intradaily intervals. This model captures the intra-daily level aggregate information rel...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
University of Wollongong
2015-03-01
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| Series: | Australasian Accounting, Business and Finance Journal |
| Subjects: | |
| Online Access: | http://ro.uow.edu.au/aabfj/vol9/iss1/4 |
| _version_ | 1811332978299633664 |
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| author | Ariful Hoque Petko S. Kalev |
| author_facet | Ariful Hoque Petko S. Kalev |
| author_sort | Ariful Hoque |
| collection | DOAJ |
| description | This paper introduces the intra-daily implied volatility (IDIV), a new volatility measure to price currency
option accurately. The IDIV is developed based on the implied volatility estimated on equally spaced intradaily
intervals. This model captures the intra-daily level aggregate information related to foreign exchange
(FX) behavior, which changes every five minutes. The implied volatility (IV) and realized volatility (RV) are
widely accepted as good estimates of daily and intra-daily price volatility, respectively. Therefore, using the
options pricing framework, we assess the capability of IDIV against IV and RV in pricing foreign currency
options. A comparison of out-of-sample forecasts under both the F-test and Diebold-Mariano test reveals that
the IDIV outperforms both the IV and the RV in estimating one-day-ahead option prices. In other words, the
IDIV estimation framework provides a more accurate and efficient volatility estimate for pricing currency
options. The findings of this study indicate that the forward looking intra-daily information of IDIV is
appropriate to price options correctly rather than forward looking daily and historical intra-daily information
is obtained by the IV and RV, respectively. |
| first_indexed | 2024-04-13T16:45:08Z |
| format | Article |
| id | doaj.art-edee531dfce84476907c679c88f77398 |
| institution | Directory Open Access Journal |
| issn | 1834-2000 1834-2019 |
| language | English |
| last_indexed | 2024-04-13T16:45:08Z |
| publishDate | 2015-03-01 |
| publisher | University of Wollongong |
| record_format | Article |
| series | Australasian Accounting, Business and Finance Journal |
| spelling | doaj.art-edee531dfce84476907c679c88f773982022-12-22T02:39:07ZengUniversity of WollongongAustralasian Accounting, Business and Finance Journal1834-20001834-20192015-03-0191435610.14453/aabfj.v9i1.4Pricing Currency Options with Intra-Daily Implied VolatilityAriful Hoque0Petko S. Kalev1Murdoch University, AustraliaUniversity of South Australia, AustraliaThis paper introduces the intra-daily implied volatility (IDIV), a new volatility measure to price currency option accurately. The IDIV is developed based on the implied volatility estimated on equally spaced intradaily intervals. This model captures the intra-daily level aggregate information related to foreign exchange (FX) behavior, which changes every five minutes. The implied volatility (IV) and realized volatility (RV) are widely accepted as good estimates of daily and intra-daily price volatility, respectively. Therefore, using the options pricing framework, we assess the capability of IDIV against IV and RV in pricing foreign currency options. A comparison of out-of-sample forecasts under both the F-test and Diebold-Mariano test reveals that the IDIV outperforms both the IV and the RV in estimating one-day-ahead option prices. In other words, the IDIV estimation framework provides a more accurate and efficient volatility estimate for pricing currency options. The findings of this study indicate that the forward looking intra-daily information of IDIV is appropriate to price options correctly rather than forward looking daily and historical intra-daily information is obtained by the IV and RV, respectively.http://ro.uow.edu.au/aabfj/vol9/iss1/4realized volatilitycurrency options pricingIntra-daily implied volatility |
| spellingShingle | Ariful Hoque Petko S. Kalev Pricing Currency Options with Intra-Daily Implied Volatility Australasian Accounting, Business and Finance Journal realized volatility currency options pricing Intra-daily implied volatility |
| title | Pricing Currency Options with Intra-Daily Implied Volatility |
| title_full | Pricing Currency Options with Intra-Daily Implied Volatility |
| title_fullStr | Pricing Currency Options with Intra-Daily Implied Volatility |
| title_full_unstemmed | Pricing Currency Options with Intra-Daily Implied Volatility |
| title_short | Pricing Currency Options with Intra-Daily Implied Volatility |
| title_sort | pricing currency options with intra daily implied volatility |
| topic | realized volatility currency options pricing Intra-daily implied volatility |
| url | http://ro.uow.edu.au/aabfj/vol9/iss1/4 |
| work_keys_str_mv | AT arifulhoque pricingcurrencyoptionswithintradailyimpliedvolatility AT petkoskalev pricingcurrencyoptionswithintradailyimpliedvolatility |