Abstract
Weekly option writing returns in currency markets are (volatility-) regime dependent: they are low when implied volatility is low, and high when implied volatility is high. However, a time-varying volatility risk premium (ex-post) might only be part of the explanation. Daily exchange rate returns show (volatility-)regime dependent departures from normality and (volatility-)regime dependent serial correlation. This leads to weekly absolute movements that differ from a reasonable expectation under normality and iid. In particular, I document positive daily autocorrelation in low implied volatility quantiles, which might arise from actions of either speculators or option market makers who trade urgently in a relatively less resilient/liquid market.
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