The Information Content of Econometric and Implied Forecasts

Abstract

This study examines the information content of various econometric and implied correlation models applied to over-the-counter currency options. To gain insight into the incremental information contribution of each forecast, a regression-based approach is undertaken, that suggests a lack of optimal data employment by the individual forecasts and that value is added when various forecasts are combined. In addition, we also examine which forecast error – correlation or volatility – contributes more to the covariance forecast error by assuming perfect foresight for either correlation or volatility forecast. In this regard, it appears that volatility forecasting has a more accurate methodology than correlation forecasting.