HCBE Faculty Articles
The information content of currency option-implied volatilities: implications for ex-ante forecasts of global equity correlations
ORCID
Antonio Figueiredo0000-0002-0362-3057
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
https://doi.org/10.1080/1351847X.2023.2189020
Volume
29
Issue
18
First Page
2128
Last Page
2153
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
