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Forward Exchange, Futures Trading, and Spot Price Variability: A General Equilibrium Approach

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  • Weller, Paul
  • Yano, Makoto

Abstract

The authors investigate the effect of opening a forward or futures market on spot price or real exchange rate variab ility in a two-agent, two-good, two-state, general-equilibrium model. This is shown to depend upon such familiar parameters as substitutio n elasticities, marginal propensities to consume, and degress of risk aversion. The analysis highlights the importance of the income trans fer, which occurs as a result of capital gains and losses in the forw ard market. The authors find some presumption in favor of the view th at opening a forward market reduces spot price variability. The presu mption is strengthened the less risk averse are agents. Copyright 1987 by The Econometric Society.

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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 55 (1987)
Issue (Month): 6 (November)
Pages: 1433-50

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Handle: RePEc:ecm:emetrp:v:55:y:1987:i:6:p:1433-50

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Cited by:
  1. Eric W. Bond & Kazumichi Iwasa & Kazuo Nishimura, 2012. "The dynamic Heckscher–Ohlin model: A diagrammatic analysis," International Journal of Economic Theory, The International Society for Economic Theory, vol. 8(2), pages 197-211, 06.
  2. Dennis, Steven A. & Sim, Ah Boon, 1999. "Share price volatility with the introduction of individual share futures on the Sydney Futures Exchange," International Review of Financial Analysis, Elsevier, vol. 8(2), pages 153-163, June.
  3. Paul H. Kupiec, 1997. "Margin requirements, volatility, and market integrity: what have we learned since the crash?," Finance and Economics Discussion Series 1997-22, Board of Governors of the Federal Reserve System (U.S.).

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