FRASER | Discover Economic History (2024)

Is Implied Correlation Worth Calculating? Evidence from Foreign Exchange Options and Historical Data, Working Paper 2000-02
Implied volatilities, as derived from option prices, have been shown to be useful in forecasting the subsequently observed volatility of the underlying financial variables. In this paper, we address the question of whether implied correlations, derived from options on the exchange rates in a currency trio, are useful in forecasting the observed correlations. We compare the forecast performance of the implied correlations from two currency trios with markedly different characteristics against correlation forecasts based on historical, time-series data. For the correlations in the USD/DEM/JPY currency trio, we find that implied correlations are useful in forecasting observed correlations, but they do not fully incorporate all the information in the historical data. For the correlations in the USD/DEM/CHF currency trio, implied correlations are much less useful. In general, since the performance of implied correlations varies across currency trios, implied correlations may not be worth calculating in all instances.
AUTHOR(S): Walter, Christian; Lopez, Jose A.
DATE: May 2, 2000
PART OF: Working Papers (Federal Reserve Bank of San Francisco)
fraser.stlouisfed.org/.../

Is Implied Correlation Worth Calculating? Evidence From Foreign Exchange Options and Historical Data, Research Paper 9730
This paper examines the performance of implied correlations in forecasting subsequently realized correlations between exchange rates. Implied correlations are derived from sets of implied volatilities on the three exchange rates in a currency trio. We compare the forecasting performance of the implied correlations from two currency trios with markedly different characteristics over two forecast horizons (one month and three months) against a set of alternative correlation forecasts based on time-series data. For the correlations in the USD/DEM/JPY currency trio, we find that the option-based forecasts are useful in predicting subsequently realized correlations. Specifically, they tend to be more accurate than the simple forecasts based on time-series data (i.e., historical correlations and exponentially weighted moving average correlations) and contain useful information that is not present in the other forecasts. However, since correlation forecasts based on a bivariate GARCH(1,1) model improve the performance of implied correlations, we reject the hypothesis that the implied correlations fully incorporate all the information in the price history. For the correlations in the USD/DEM/CHF currency trio, the option-implied correlation forecasts are less useful in predicting realized correlations. For two of the three correlations, implied correlations are not as accurate as the forecasts based on time-series data and provide no additional information. For the third correlation, the implied correlations do contain useful information, but the economic benefits of using these implied correlations may be small due to this correlation's low level of variability.
AUTHOR(S): Walter, Christian; Lopez, Jose A.
DATE: September 1997
PART OF: Research Papers (Federal Reserve Bank of New York)
fraser.stlouisfed.org/.../

Inflation Expectations and Risk Premia in Emerging Bond Markets : Evidence from Mexico, Working Paper 2021-08
To study inflation expectations and associated risk premia in emerging bond markets, thispaper provides estimates for Mexico based on an arbitrage-free dynamic term structuremodel of nominal and real bond prices that accounts for their liquidity risk. In addition todocumenting the existence of large and time-varying liquidity premia in nominal and realbond prices that are only weakly correlated, the results indicate that long-term inflationexpectations in Mexico are well anchored close to the inflation target of the Bank ofMexico. Furthermore, Mexican inflation risk premia are larger and more volatile thanthose in Canada and the United States.
AUTHOR(S): Beauregard, Remy; Fischer, Eric; Christensen, Jens Henrik Eggert; Zhu, Simon
DATE: November 8, 2021
PART OF: Working Papers (Federal Reserve Bank of San Francisco)
fraser.stlouisfed.org/.../inflation-expectations-risk-premia-emerging-bond-markets-639620

Meeting, December 15-16, 2009
Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents, Meeting, December 15-16, 2009 by Open Market Investment Committee for the Federal Reserve System, Open Market Policy Conference for the Federal Reserve System, United States. Federal Open Market Committee
AUTHOR(S): Open Market Investment Committee for the Federal Reserve System; Open Market Policy Conference for the Federal Reserve System; United States. Federal Open Market Committee
DATE: December 15-16, 2009
PART OF: Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents
fraser.stlouisfed.org/.../meeting-december-15-16-2009-23288

Carry Factors : Characteristics and Informational Content
This post discusses the informational content of carry factors for policy analysis. It highlights the predictive content of the bond and commodity carry, respectively, for recessions and inflation, and the commonality in the currency carry.
AUTHOR(S): Gospodinov, Nikolay; Jamali, Ibrahim
DATE: March 2019
PART OF: Notes from the Vault
fraser.stlouisfed.org/title/notes-vault-7163/carry-factors-656115

China's Monetary Policy and the Exchange Rate, Working Paper 2010-19
The paper models monetary policy in China using a hybrid McCallum-Taylor empirical reaction function. The feedback rule allows for reactions to inflation and output gaps, and to developments in a trade-weighted exchange rate gap measure. The investigation finds that monetary policy in China has, on average, accommodated inflationary developments. But exchange rate shocks do not significantly affect monetary policy behavior, and there is no evidence of a structural break in the estimated reaction function at the end of the strict dollar peg in July 2005. The paper also runs an exercise incorporating survey-based inflation expectations into the policy reaction function and meets with some success.
AUTHOR(S): Mehrotra, Aaron N., 1975-; Sánchez-Fung, José Roberto
DATE: July 2010
PART OF: Working Papers (Federal Reserve Bank of San Francisco)
fraser.stlouisfed.org/.../chinas-monetary-policy-exchange-rate-639790