CONDITIONAL VOLATILITY AND THE INFORMATIONAL EFFICIENCY OF THE PHLX CURRENCY OPTIONS MARKET

The relative performance of implied and historical volatility predictors is compared for four exchange rates from 1985 to 1991. For three currencies, ARCH models estimated up to 1989 show that PHLX implied volatilities provide specifications for daily conditional variances which can not be significantly improved by using past returns. This result is consistent with the informational efficiency of the Philadelphia currency options market. Out-of-sample forecasts of the average volatility over four-week periods are evaluated for 1990 and 1991. Once more the implied predictors are superior to historical predictors.