| In light of recent work on the microstructure of option markets, this paper attempts to examine the multi-market linkage of price and information in currency option and spot exchange rate markets. Previous studies find that implied volatility (ISD) of call options is usually different from that of put options, because of the non-lognormal distribution of underlying assets' prices. This study develops the Direction Bias Hypothesis regarding the information content of ISD asymmetry for currency option markets. Using PHLX currency options, the results provide some evidence about the existence of the relationship between the ISD differences and future exchange rate changes. This finding implies that ISD differences may be used as indicators of future price (exchange rate) movements and suggests that ISDs may be not only relevant to future realized volatilities, but also related to the first moment of the underlying asset price distribution. |
