Does Option-Implied Cross-Sectional Return Dispersion Forecast Realized Cross-Sectional Return Dispersion? Evidence from the G10 Currencies
31 Pages Posted: 17 Oct 2015 Last revised: 26 May 2016
Date Written: May 24, 2016
This study employs option-price data to back out the implied cross-sectional return variance in the G10 currencies. It investigates the relation of implied cross-sectional return dispersion in the currency market and subsequent realized cross-sectional return dispersion. We find that implied cross-sectional return variance, based on option-price data with one-month and three-month maturity, outperforms past cross-sectional return variance in forecasting future cross-sectional return variance.
Keywords: Return dispersion, currency markets, G10 currencies, implied cross-sectional return dispersion
JEL Classification: G21, G14
Suggested Citation: Suggested Citation