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Stochastic Skew in Currency Options ∗
BibTeX
@MISC{A_stochasticskew,
author = {Peter Carr A and B Liuren Wu C and Andrew Dexter and Bernard Dumas and Bruno Dupire and Stephen Figlewski and Brian Healy and Kris Jacobs and Alireza Javaheri and Dilip Madan},
title = {Stochastic Skew in Currency Options ∗},
year = {}
}
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Abstract
We document 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. JEL Classification: G12; G13; F31; C52.
Keyphrases
currency option stochastic skew strong asymmetry currency return conditional risk-neutral distribution jel classification calendar time traded currency pair over-the-counter currency option price stochastic skew model stochastic skew behavior traditional jump-diffusion stochastic volatility model model estimation
