A Minted Panacea for the Chicken-Egg Dilemma in Pricing Currency Options
The implied volatility (IV) estimation process suffers from an obvious chicken-egg dilemma: obtaining an unbiased IV requires the options to be priced correctly and calculating an accurate option price requires an unbiased IV. We address this critical issue in two steps. First, the Granger causality test is employed, which confirms the chicken-and-egg problem in the IV computing process. Secondly, the concept of money ness volatility (MV) is introduced as an alternative to IV. MV is modeled based on an options moneyness during the life of the options contract. The F-test, GrangerNew bold test and Diebold-Mariano test results consistently show that MV outperforms IV in estimating the exchange rate volatility for pricing options. Further, these series of tests across six major currency options substantiate the validity as well as the reliability of the results. We posit that MV offers a unique solution for pricing currency options accurately.
Implied volatility moneyness volatility Granger causality test F-test, Granger-Newbold test, Diebold-Mariano test
Ariful Hoque Chandrasekhar Krishnamurti
School of Commerce University of South Australia Adelaide, Australia School of Accounting, Economics and Finance University of Southern Queensland Toowoomba, Australia
国际会议
上海
英文
531-537
2011-03-11（万方平台首次上网日期，不代表论文的发表时间）