Common factors and causality in the dynamics of implied volatility surfaces:evidence from the FX OTC market

Chalamandaris, G. and Tsekrekos, Andrianos (2009) Common factors and causality in the dynamics of implied volatility surfaces:evidence from the FX OTC market. Journal of Economic Asymmetries, 6 (1). pp. 49-74. ISSN 1703-4949

Full text not available from this repository.

Abstract

In this paper we explore the dynamics of Implied Volatility Surfaces (IVS) both in a single-currency framework, and in the context of a global, integrated market. We construct a parametric function of “moneyness” and “time-to-maturity” factors that correspond to common shapes of IVS with evident financial intuition. In the first part of the paper, we analyze the time series properties of the estimated factor loadings coefficients, and at the same time the intuition behind the derived associations between them. The second part of the paper, explores the interaction between IVSs of different currency pairs in two stages. In the first stage, shape transmission between IVSs is examined, using simple linear causality tests. We answer the question whether certain shapes in one currency are transmitted to another. The second stage, involves an exploratory factor analysis to uncover latent common factors, across all currencies, which explain part of IVS variability. Our results uncover large idiosyncratic components in the emerging markets IVSs and dominant common factors that explain most of the variability in the main European currencies.

Item Type: Journal Article
Journal or Publication Title: Journal of Economic Asymmetries
Uncontrolled Keywords: /dk/atira/pure/subjectarea/asjc/2000
Subjects:
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 64680
Deposited By: ep_importer_pure
Deposited On: 21 May 2013 08:37
Refereed?: Yes
Published?: Published
Last Modified: 03 Oct 2019 02:24
URI: https://eprints.lancs.ac.uk/id/eprint/64680

Actions (login required)

View Item View Item