Stochastic skew in currency options

• 成果类型: Article
• 署名作者: Carr, Peter; Wu, Liuren
• 署名单位: City University of New York (CUNY) System; Baruch College (CUNY); Bloomberg L.P.; New York University
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2006.03.010
• 发表日期: 2007
• 页码: 213-247
• 关键词: CURRENCY OPTIONS; foreign exchange dynamics; stochastic skew; stochastic volatility; time-changed; Levy processes

摘要

We analyze the behavior of over-the-counter currency option prices across moneyness, maturity, and calendar time on two of the most actively traded currency pairs over the past eight years. We find that, on any given date, the conditional risk-neutral distribution of currency returns can show strong asymmetry. This asymmetry varies greatly over time and often switches signs. We develop and estimate a class of models that captures this stochastic skew behavior. Model estimation shows that our stochastic skew models significantly outperform traditional jump-diffusion stochastic volatility models both in sample and out of sample. (C) 2007 Elsevier B.V. All rights reserved.