The information content of currency option-implied volatilities: implications for ex-ante forecasts of global equity correlations
The European Journal of Finance
ISSN or ISBN
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.
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.