| Popis: |
I propose a model-free method to derive forward-looking betas to currency portfolios from cross-pair currency options. Using the dollar factor - an equal-weighted basket of foreign currencies against the U.S. dollar - as the systematic factor, I find that these option-implied betas are significantly better predictors of realized betas and currency excess returns compared to traditional rolling window betas. Constructing portfolios based on option-implied betas leads to a significantly positive relation between ex-ante betas and ex-post portfolio returns, whereas there is an insignificant relation when rolling window betas are used. |
