Option-Implied Currency Risk Premia - Princeton University

Figure 3. Fitted and Actual Option-Implied Volatilities. This figure plots the mean actual option-implied volatilities (blue)
and their fitted counterparts (dashed red) for cross pairs formed by combining two high interest rate currencies (AUD, NOK) with
two low interest rate currencies (CHF, JPY), as well as, pairs involving each of these currencies against the U.S. dollar. These
pairs represent a subset of the 24 pairs used in the model calibration (Specification I) on which these plots are based. All values
are annualized and reported in units of percent per annum. To illustrate the economic quality of the fit, the actual mean implied
volatility is plotted with a typical bid-ask spread (dashed blue lines), equal to 0.1 times the implied volatility at that strike; the mean
at-the-money volatility is reported in the title of each subplot. For each currency pair we plot option-implied volatilities at the five
quoted strikes (10δ put, 25δ put, at-the-money, 25δ call, 10δ call). The plot reports time-series means computed using daily data
for the period 1999:1-2012:6.
20
CHF/AUD: ATM Vol = 12.06%
20
NOK/CHF: ATM Vol = 8.38%
20
CHF/USD: ATM Vol = 11.00%
15
15
15
10
10
10
5
10dp 25dp ATM 25dc 10dc
5
10dp 25dp ATM 25dc 10dc
5
10dp 25dp ATM 25dc 10dc
20
AUD/JPY: ATM Vol = 14.60%
20
NOK/JPY: ATM Vol = 13.75%
20
JPY/USD: ATM Vol = 10.92%
15
15
15
10
10
10
5
10dp 25dp ATM 25dc 10dc
5
10dp 25dp ATM 25dc 10dc
5
10dp 25dp ATM 25dc 10dc
20
AUD/USD: ATM Vol = 12.29%
20
NOK/USD: ATM Vol = 12.21%
15
15
10
10
5
10dp 25dp ATM 25dc 10dc
5
10dp 25dp ATM 25dc 10dc