Overreactions in the Foreign Currency Options Market

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The seminal research by Stein (Journal of Finance 1989, 44, 1011) shows that long-term options overreact to short-term volatility shocks. In contrast, recent studies show that such irrational responses disappear when model-free implied volatilities are used. We extend this literature by examining overreactions in the over-the-counter currency options market. Using model-free implied volatility and by considering the estimated structural breaks around recent financial crises, we find consistent evidence for volatility overreactions during non-crisis periods but no conclusive evidence of such behavior during recent crises periods. Overall, our findings suggest that it is crucial to consider structural changes when testing for overreactions in options markets
Publisher
WILEY-BLACKWELL
Issue Date
2016-06
Language
English
Article Type
Article
Keywords

STOCHASTIC VOLATILITY; TERM STRUCTURE; MISREACTION; INFORMATION; PRICES; MODELS

Citation

ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, v.45, no.3, pp.380 - 404

ISSN
2041-9945
DOI
10.1111/ajfs.12133
URI
http://hdl.handle.net/10203/212488
Appears in Collection
MT-Journal Papers(저널논문)
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