Explanatory factors and causality in the dynamics of volatility surfaces implied from OTC Asian–Pacific currency options

Chalamandaris, G. and Tsekrekos, Andrianos (2013) Explanatory factors and causality in the dynamics of volatility surfaces implied from OTC Asian–Pacific currency options. Computational Economics, 41 (3). pp. 327-358. ISSN 0927-7099

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Abstract

Volatility implied from observed option contracts systematically varies with the contracts’ strike price and time to expiration, giving rise to an instantaneously non-flat implied volatility surface (IVS) that exhibits substantial time variation. We identify a number of latent factors that drive the dynamics of the IVSs from options on 11 Asian–Pacific exchange rates and show that these have a natural interpretation in the law of motion of each surface. We present evidence that these latent factors are related due to their common dependence on exogenous economy-wide variables. Findings suggest that the factors capturing (i) the volatility level of the Japanese yen and the Chinese yuan, (ii) the volatility term structure of the Japanese yen, Taiwanese and Australian dollars and (iii) the risk aversion towards the Australian dollar, Japanese yen and Chinese yuan seem to incorporate first the investors’ expectations regarding the volatility in the region.

Item Type:
Journal Article
Journal or Publication Title:
Computational Economics
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1700/1706
Subjects:
ID Code:
64598
Deposited By:
Deposited On:
20 May 2013 08:32
Refereed?:
Yes
Published?:
Published
Last Modified:
01 Jan 2020 08:29