The Intertemporal Relationship Between the Currency Spot Market and the Currency Option Market |
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| Authors: | Ming-Shiun Pan Ralph T Hocking & Hong K Rim |
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| Institution: | Department of Finance, Management Science, and Information Systems, Shippensburg University, Shippensburg, PA 17257, USA |
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| Abstract: | This study examines the lead/lag relationship between currency option and currency spot markets for the Deutsche mark and the Japanese yen. Using intraday currency option transactions data for the year 1989 and applying a European type currency option pricing model, pair data series of the implied and the observed exchange rates are compiled. Causality tests are then employed to test the causal relation between the observed and the implied exchange rate changes. The results indicate that the currency spot market leads the currency option market by about ninety minutes. |
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| Keywords: | currency spot rates currency options implied standard deviation implied spot rates causality |
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