Cause-and-effect between implied volatility and options price

Article

Hoque, Ariful. 2010. "Cause-and-effect between implied volatility and options price." Academy of Taiwan Business Management Review. 6 (3), pp. 111-117.
Article Title

Cause-and-effect between implied volatility and options price

ERA Journal ID211566
40538
Article CategoryArticle
Authors
AuthorHoque, Ariful
Journal TitleAcademy of Taiwan Business Management Review
Academy of Taiwan Business Management Revie
Journal Citation6 (3), pp. 111-117
Number of Pages7
Year2010
PublisherTaiwan Institute of Business Administration
Place of PublicationTaiwan
ISSN1813-0534
Web Address (URL)http://www.jtiba.com/
Abstract

Implied volatility is widely believed to be the best underlying exchange rate volatility forecast for pricing currency options. To measure unbiased implied volatility requires accurate options price. Unbiased implied volatility is also needed for pricing options correctly. Consequently, an interesting question is raised, is it options price that causes the implied volatility or is it the implied volatility that causes options price? This study employs the Granger causality test to address this critical issue for six major currency options are traded in Philadelphia Stock Exchange. The test results identify the bilateral Granger causality between implied volatility and options price, which distorts options pricing accuracy. We, therefore, cannot conclude that the implied volatility is the best choice for pricing currency options.

Keywordsimplied volatility; currency options price; Granger causality test; MATLAB; bilateral causality
ANZSRC Field of Research 2020350202. Finance
380110. International economics
380203. Economic models and forecasting
Public Notes

Copyright Taiwan Institute of Business Administration.

Byline AffiliationsSchool of Accounting, Economics and Finance
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