Using Deutschmark currency option data from the Philadelphia Stock Exchange and British pound option data from the Chicago Mercantile Exchange, this article examines the signaling quality of option volume measures on movements in the underlying spot exchange rates. The concept of a volume-weighted strike distribution is proposed. It is demonstrated that measures using the strike distribution are inherently better predictors of both direction and volatility of the exchange rate movements as compared to their more traditional counterparts used in practice, such as the put-call ratio.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Sep 22, 2007
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