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Forecasting implied volatility in foreign exchange markets: a functional time series approach

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dc.contributor.author Kearney, Fearghal
dc.contributor.author Cummins, Mark
dc.contributor.author Murphy, Finbarr
dc.date.accessioned 2018-10-08T13:18:03Z
dc.date.available 2018-10-08T13:18:03Z
dc.date.issued 2018
dc.identifier.uri http://hdl.handle.net/10344/7202
dc.description peer-reviewed en_US
dc.description.abstract We utilise novel functional time series (FTS) techniques to characterise and forecast implied volatility in foreign exchange markets. In particular, we examine the daily implied volatility curves of FX options, namely; Euro/United States Dollar, Euro/British Pound, and Euro/Japanese Yen. The FTS model is shown to produce both realistic and plausible implied volatility shapes that closely match empirical data during the volatile 2006-2013 period. Furthermore, the FTS model significantly outperforms implied volatility forecasts produced by traditionally employed parametric models. The evaluation is performed under both in-sample and out-of-sample testing frameworks with our findings shown to be robust across various currencies, moneyness segments, contract maturities, forecasting horizons, and out-of-sample window lengths. The economic significance of the results is highlighted through the implementation of a simple trading strategy. en_US
dc.language.iso eng en_US
dc.publisher Taylor and Francis Ltd en_US
dc.relation.ispartofseries The European Journal of Finance;24 (1), pp. 1-18
dc.relation.uri http://dx.doi.org/10.1080/1351847X.2016.1271441
dc.rights This is an Author's Manuscript of an article whose final and definitive form, the Version of Record, has been published in The European Journal of Finance 2018 copyright Taylor & Francis, available online at: http://dx.doi.org/10.1080/1351847X.2016.1271441 en_US
dc.subject Exchange rates en_US
dc.subject implied volatility en_US
dc.subject forecasting en_US
dc.subject functional data analysis en_US
dc.subject functional time series en_US
dc.title Forecasting implied volatility in foreign exchange markets: a functional time series approach en_US
dc.type info:eu-repo/semantics/article en_US
dc.type.supercollection all_ul_research en_US
dc.type.supercollection ul_published_reviewed en_US
dc.date.updated 2018-10-08T13:11:50Z
dc.identifier.doi 10.1080/1351847X.2016.1271441
dc.rights.accessrights info:eu-repo/semantics/openAccess en_US
dc.internal.rssid 2738604
dc.internal.copyrightchecked Yes
dc.identifier.journaltitle European Journal Of Finance
dc.description.status peer-reviewed


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