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Predicting Volatility in the Foreign Exchange Market

Philippe Jorion
The Journal of Finance
Vol. 50, No. 2 (Jun., 1995), pp. 507-528
Published by: Wiley for the American Finance Association
DOI: 10.2307/2329417
Stable URL: http://www.jstor.org/stable/2329417
Page Count: 22
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Predicting Volatility in the Foreign Exchange Market
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Abstract

Measures of volatility implied in option prices are widely believed to be the best available volatility forecasts. In this article, we examine the information content and predictive power of implied standard deviations (ISDs) derived from Chicago Mercantile Exchange options on foreign currency futures. The article finds that statistical time-series models, even when given the advantage of "ex post" parameter estimates, are outperformed by ISDs. ISDs, however, also appear to be biased volatility forecasts. Using simulations to investigate the robustness of these results, the article finds that measurement errors and statistical problems can substantially distort inferences. Even accounting for these, however, ISDs appear to be too variable relative to future volatility.

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