Work

The Volatility Risk Premium Embedded in Currency Options

Year: 2005

Type: article

Abstract: This study employs a non-parametric approach to investigate the volatility risk premium in the over-the-counter currency option market. Using a large database of daily delta-neutral straddle quotes in four major currencies—the British pound, the euro, the Japanese yen, and the Swiss franc—we find that volatility risk is priced in all four currencies across different option maturities. We find that the volatility risk premium is negative, with the premium decreasing in maturity. Finally, we also find evidence that jump risk may be priced in the currency option market.

Source: Journal of Financial and Quantitative Analysis

DOI: 10.1017/s0022109000001988

Authors: Buen Sin Low, Shaojun Zhang

Institution: Nanyang Technological University

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W1999667290

FWCI: 7.401

Cites: 33

Cited by: 56

Related to: 10