In this paper we look at the distribution and statistical behavior of what is known as implied volatilities in the foreign exchange (FX) market. We describe the statistical properties of over-the-counter foreign exchange (OTC FX) options implied at-the-money volatilities. The data set is unique because it presents continuous daily observations of implied volatility. Trying to do the same type of analysis for almost any other option market is very difficult because the data will be “unclean” for this purpose. This is explained in more detail. We find the distribution of implied volatilities has a high peak and fat tails relative to the Gaussian distribution. We also find that the short-term implied volatilities are more volatile than long-term implied volatilities. The data show that the volatility of implied volatility is unstable over time and the correlation between the implied volatilities varies considerably over time. The paper discusses the various implications of these issues. An important question one needs to ask is: What are implied volatilities measuring? The answer to this question is not quite clear in the literature and will affect interpretation of the data.
Copyright American Society of Appraisers
The information contained in this product is based on content obtained by ASA from sources considered to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. BVR and ASA accept no liability for the use of such information which is provided "AS IS" and with no warranties, express or implied.