The volatility risk premium embedded in currency options

Buen Sin Low, Shaojun Zhang

Research output: Journal article publicationReview articleAcademic researchpeer-review

23 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)803-832
Number of pages30
JournalJournal of Financial and Quantitative Analysis
Volume40
Issue number4
DOIs
Publication statusPublished - 1 Dec 2005
Externally publishedYes

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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