Testing the Informational Efficiency of OTC Optionson Emerging Market Currencies

This paper analyzes the informational efficiency of OTC currency options on the Czech koruna and the Polish zloty correcting for the volatility risk premium and errors-in-variable problems, using state-of-the-art techniques (Chernov 2001). It finds that these markets are more efficient than mature markets possibly because of higher relative participation of informed dedicated investors, which offset the effects of relative illiquidity and higher transaction costs in these countries. Moreover, implied volatilities generally anticipate the direction of volatility correctly, with a bias to overpredicting volatility increases reflecting one-sided markets.
Publication date: January 2003
ISBN: 9781451841657
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Money and Monetary Policy , Money and Monetary Policy , Currency options , efficient markets , GMM , statistic , exchange rate , forecasting , exchange rate volatility

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