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Implied volatility smirk in the Australian dollar market

Author

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  • Connor J.A. Stuart
  • Sebastian A. Gehricke
  • Jin E. Zhang
  • Xinfeng Ruan

Abstract

This is the first paper to study the options written on the Invesco Currency Shares Australian Dollar Trust (FXA) exchange‐traded fund (ETF). We quantify the empirical characteristics of the FXA option implied volatility (IV) curve showing that it exhibits a smirk shape, as in US equity options, and the curves become more negatively sloped and exhibit more convexity as the time to maturity increases. During the Global Financial Crisis (GFC) period and a bullish period, IV dramatically increased and the slope became even steeper across all maturities indicating that downside insurance is relatively expensive. Further, the information in the quantified IV curve factors has some predictive power for monthly FXA returns.

Suggested Citation

  • Connor J.A. Stuart & Sebastian A. Gehricke & Jin E. Zhang & Xinfeng Ruan, 2021. "Implied volatility smirk in the Australian dollar market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 4573-4599, September.
    • Handle: RePEc:bla:acctfi:v:61:y:2021:i:3:p:4573-4599
    DOI: 10.1111/acfi.12741
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