HCBE Faculty Articles

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

Document Type

Article

Publication Date

3-21-2023

Publication Title

The European Journal of Finance

ISSN or ISBN

1351-847X

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

ORCID ID

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

Peer Reviewed

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