Modeling realized volatility of the EUR/USD exchange rate: Does implied volatility really matter?
The result's identifiers
Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F00216224%3A14560%2F21%3A00118770" target="_blank" >RIV/00216224:14560/21:00118770 - isvavai.cz</a>
Result on the web
<a href="https://www.sciencedirect.com/science/article/pii/S105905602030229X" target="_blank" >https://www.sciencedirect.com/science/article/pii/S105905602030229X</a>
DOI - Digital Object Identifier
<a href="http://dx.doi.org/10.1016/j.iref.2020.10.001" target="_blank" >10.1016/j.iref.2020.10.001</a>
Alternative languages
Result language
angličtina
Original language name
Modeling realized volatility of the EUR/USD exchange rate: Does implied volatility really matter?
Original language description
We model future EUR/USD exchange rate realized volatility (RV) within a class of heterogeneous autoregressive (HAR) models augmented by implied volatilities (IVs). The existing literature has almost unanimously employed IVs from options with one-month maturities; however, our in-sample analysis shows that using IVs from options with a shorter maturity (of one day and one week) might be more relevant when explaining the volatility of the next day and week. In general, IVs are more useful in predicting future RV than past RVs (daily, weekly and monthly averages). At the same time, RVs seem to contain only small incremental predictive power compared to IVs. The out-of-sample results strengthen our in-sample results, as they show the increased predictive power of the models with implied volatility up to 17.3% for one-day-ahead, 42.1% for one-week-ahead, and 22.8% for one-month-ahead forecasts. Additionally, the superior set of models contains only volatility model specifications with IVs. Our results hold not only for individual forecast models but also for combinations of volatility forecasts. We show that increased forecasting accuracy is stable across time and that it is achieved during periods of high market volatility. Our study also provides new evidence that implied volatility from short-lived options as a serious contender for modeling realized volatility
Czech name
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Czech description
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Classification
Type
J<sub>imp</sub> - Article in a specialist periodical, which is included in the Web of Science database
CEP classification
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OECD FORD branch
50206 - Finance
Result continuities
Project
<a href="/en/project/GA18-05829S" target="_blank" >GA18-05829S: Forecasting Volatility in Emerging Financial Markets</a><br>
Continuities
P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)
Others
Publication year
2021
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů
Data specific for result type
Name of the periodical
International Review of Economics & Finance
ISSN
1059-0560
e-ISSN
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Volume of the periodical
71
Issue of the periodical within the volume
January
Country of publishing house
NL - THE KINGDOM OF THE NETHERLANDS
Number of pages
19
Pages from-to
811-829
UT code for WoS article
000596671900028
EID of the result in the Scopus database
2-s2.0-85094625465