Prague Economic Papers 2026, 35(1):1-27 | DOI: 10.18267/j.pep.906

Volatility Modelling - What Drives Cee Currency Option Prices?

Piotr Mielus ORCID...
Szko³a G³ówna Handlowa w Warszawie

This paper investigates the drivers of foreign exchange implied volatility in Central and Eastern European (CEE) countries. Currencies in non-euro EU countries are particularly sensitive to changes in market sentiment. Risk aversion significantly impacts the implied volatility surface for FX options, making these options crucial for managing skew risk. By analysing option prices, this study identifies co-movements between spot rates, interest rates, and volatilities for specific option strategies. Empirical evidence reveals robust determinants of volatility levels, volatility smiles, and volatility term structures. Applying error correction models and the directional quality measure across a long time span (2010-2025), we find that spot rate movements and mean reversion play significant roles in shaping implied volatilities in CEE markets, with patterns distinct from those in developed markets. The data suggests that the spot price rise is positively correlated with the pricing of both straddles and risk reversals. Our findings provide new insights into the behaviour of FX volatility in semi-liquid markets and have practical implications for pricing, hedging, and policy signalling in the CEE region.

Keywords: currency options, directional quality measure, error correction models, volatility surface
JEL classification: C53, C58, G15, G17

Received: July 29, 2025; Revised: December 22, 2025; Accepted: February 4, 2026; Published: April 1, 2026  Show citation

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Mielus, P. (2026). Volatility Modelling - What Drives Cee Currency Option Prices? Prague Economic Papers, 35(1), 1-27. doi: 10.18267/j.pep.906
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