✦ LIBER ✦

The interrelation of price volatility and trading volume of currency options

✍ Scribed by Ghulam Sarwar

Publisher: John Wiley and Sons
Year: 2003
Tongue: English
Weight: 126 KB
Volume: 23
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.10078

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

This article examines the interrelations between future volatility of the U.S. dollar/British pound
exchange rate and trading volume of currency options for the British pound. The future volatility of the
exchange rate is approximated alternatively by implied volatility and by IGARCH volatility. The results suggest
the presence of strong contemporaneous positive feedbacks between the exchange rate volatility and the trading
volume of call and put options. Previous option volumes have significant predictive power with respect to the
expected future volatility of the dollar/pound exchange rate. Similarly, lagged volatilities jointly have
significant predictive power for option volume. Although option volume (volatility) responds somewhat
differently to individual volatility (volume) terms under the two volatility measures, the overall
volume‐volatility relations are broadly similar between the implied and IGARCH volatilities. The results
generally support the hypothesis that the information‐based trading explains more of the trading volume
in currency options on the U.S. dollar/British pound exchange rate than hedging. © 2003 Wiley
Periodicals, Inc. Jrl Fut Mark 23:681–700, 2003

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