The Information Embedded in the FX Options and Its Ability to Forecast
Date Issued
2007
Date
2007
Author(s)
Chuang, Yung-Fu
DOI
en-US
Abstract
With the characteristic of forward-looking, the prices of options are able to reflect the expectation of market participants. The aim of this paper is to exam the relationship between changes in the risk neutral probability implied by the option market prices and changes in the future exchange rate and try to construct simple indicators to predict the future direction of exchange rates. This paper uses plenty daily foreign exchange market quotes from October, 2003 to July, 2007. These quotes are all FX options with maturity of one month on six different currency pairs: USDJPY, AUDUSD, NZDUSD, GBPUSD, EURUSD and USDTWD. I use the method introduced by Shimko (1993) to derive the risk neutral probability implied from the market quotes and further calculate the characteristic statistics of distributions.
The results show the changes in skewness and range (defined as the range of quotes) have significant explanatory power on the changes and directions of future exchange rate for most currency pairs. Though for most currency pairs, the hit rate of the indicator is not ideal. However the average hit rate of USDJPY is about 60%. Also, with the modifications of judgment rules, the accuracy is somewhat improved, especially on the AUD and GBP.
Subjects
外匯選擇權
風險中立機率分配函數
外匯預測
FX option
risk neutral probability
exchange rate forecast
Type
thesis