Volatility and the cross-section of returns on FX options

• 成果类型: Article
• 署名作者: Fullwood, Jonathan; James, Jessica; Marsh, Ian W.
• 署名单位: Bank of England; Commerzbank AG; City St Georges, University of London
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2021.04.030
• 发表日期: 2021
• 页码: 1262-1284
• 关键词: Options returns; implied volatility; Straddles; Foreign exchange

摘要

We study the cross-section of returns on FX options sorting currencies based on implied volatilities (IVs). Long straddle positions in currencies with low (high) IVs perform well (poorly). A long low IV-short high IV strategy produces large average returns after transac-tion costs. Total volatility matters rather than any component or transformation of volatil -ity. The returns are distinct from those in the literature on foreign exchange returns or equity option returns and cannot be explained convincingly by standard risk factors. We argue cross-sectional differences in hedging demand combined with limits to arbitrage contribute to mispricing in FX options. (c) 2021 Elsevier B.V. All rights reserved.