The information content of currency option-implied volatilities: implications for ex-ante forecasts of global equity correlations

Author(s)

Antonio Figueiredo, Nova Southeastern UniversityFollow
Ali M. Parhizgari, Florida International University
Brice Dupoyet, Florida International University

ORCID

0000-0002-0362-3057, 0000-0001-7223-8542

Document Type

Article

Publication Title

The European Journal of Finance

ISSN

1351-847X

Publication Date

3-21-2023

Abstract/Excerpt

We use existing currency models, global capital flows, international parity, the Taylor rule, and some simplifying assumptions to derive and empirically test a link between the information contained in currency option-implied volatilities and future global equity correlations. Using data from January 1999 to May 2020, we test our hypothesis and find that exchange rate option-implied volatilities — coupled with one-period ex-post correlations — more accurately predict subsequent world equity market correlations than other models. Our findings have implications for portfolio diversification, forecasts of overall equity portfolio volatility, and portfolio optimization.

DOI

10.1080/1351847X.2023.2189020

NSUWorks Citation

Figueiredo, Antonio; Parhizgari, Ali M.; and Dupoyet, Brice, "The information content of currency option-implied volatilities: implications for ex-ante forecasts of global equity correlations" (2023). HCBE Faculty Articles. 1182.
https://nsuworks.nova.edu/hcbe_facarticles/1182