Volatility and the Cross-Section of Returns on FX Options

Seminar abstract

We study the cross-section of returns on FX options sorting currencies based on implied volatilities (IV).

Long straddle positions in currencies with low (high) implied volatilities perform well (poorly). A long low IV-short high IV strategy produces large average returns after transaction costs. total volatility matters rather than any component or transformation of volatility.

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 that mispricing is caused by cross-section differences in hedging demand combined with limits to arbitrage. 

Booking

This is a free event. Please feel free to bring your colleagues, classmates and friends along.

Speaker bio

Professor Ian Marsh has worked in the City of London as an international banker and financial market economist for the IMF, the Bank of England and in academia.

He is a Professor of Finance and has been at Cass Business School since 1998.

Ian has published in academic journals such as;

• Journal of Finance
• Journal of Monetary Economics
• Review of Economics and Statistics

He is also the co-editor of the Handbook of Foreign Exchange (Wiley).

Professor Marsh's research interest include

• foreign exchange forecasting
• market micro-structure
• behavioural finance
• credit risk transfer markets