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Foreign exchange, fractional cointegration and the implied?realized volatility relation

Kellard, NM and Dunis, C and Sarantis, N (2010) 'Foreign exchange, fractional cointegration and the implied?realized volatility relation.' Journal of Banking & Finance, 34 (4). pp. 882-891. ISSN 0378-4266

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Almost all relevant literature has characterized implied volatility as a biased predictor of realized volatility. In this paper we provide new time series techniques to investigate the validity of this finding in several foreign exchange options markets, including the Euro market. First, we develop a new fractional cointegration test that is shown to be robust to both stationary and non-stationary regions. Second, we employ both intra-day and daily data to measure realized volatility in order to assess the relevance of data frequency in resolving the bias. Third, we use data on implied volatility traded on the market. In contrast to previous studies, we show that the frequency of data used for measuring realized volatility within a fractionally cointegrating framework is important for the results of unbiasedness tests. Significantly, for many popular exchange rates, the use of intra-day rather than daily data affects the emergence of a different bias, as the possibility of a fractionally integrated risk premium admits itself!

Item Type: Article
Uncontrolled Keywords: Market efficiency; Options markets; Fractional cointegration; Narrow band least squares; Bootstrap; Traded volatility; Intra-day data
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 15 Nov 2011 10:14
Last Modified: 06 Jan 2022 13:30

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