With currencies currently in the spotlight due to the recent outsized movement of the Pound, we thought it might be helpful to look at historical expected moves of the Pound, Yen, and Euro that are implied by their volatility indexes. After forming 45-day, 1 standard deviation expected moves via these indexes, we then compare them to the actual realized moves in these currencies to see if implied volatility has historically overstated the way it has in stock indexes like the S&P 500.
History shows that since 2007, all three of these major currencies stayed within their implied moves more often than the expected 68% (1 standard deviation). The Yen saw the best results with the Yen’s implied volatility significantly overstating quite often.
Tom takes a couple of minutes to apply this study to the current implied volatility seen in the Pound and its recent outsized moves.