Is it worth tracking dollar/real implied volatility?

Abstract

In this paper we examine the relation between dollar-real exchange rate volatility implied in option prices and subsequent realized volatility, in the period of February 1999 to February 2001. Our results are in line with recent literature, suggesting that the implied volatility obtained from a simple option pricing model, although an upward-biased estimator offuture volatility, does provide information about volatility over the remaining life ofthe option which is not present in past returns. Results are robust to the choice oftwo alternative time series models to explore information embedded in returns, a fixed volatility and a GARCH(1,1) model, even allowing for in-sample forecasts by the GARCH(1,1) model. Results are also robust to the choice ofmeasuring realized volatility in two alternative ways.

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