Analyzing Devaluation Fears in an Emerging Forward Exchange Market: Greece During 1992
AbstractThe present paper focuses on the assessment of devaluation expectations in Greek forward exchange market during the turbulent year 1992. We describe the institutional changes underwent in the Greek forward exchange market in its transition from capital controls to a liberalized regime during the period from January 1992 when the forward market begun to operate until September 1992 when the market collapsed under the pressure of EMS crisis. We develop a simple model for the assessment of collapse expectations of a forward exchange market: the government announces a target depreciation rate but this is not fully credible to the market and, therefore, agents attach a probability of a discrete exchange rate shift to their forward contracts. Finally, we obtain time-varying estimates of the collapse probabilities as implied by the theoretical model, which seem to vary whenever an event likely to affect the policy course occurs. Collapse expectations peak prior to the September 1992 EMS crisis which led to the suspension of transactions in the Greek forward exchange market.
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Bibliographic InfoArticle provided by Cyprus Economic Society and University of Cyprus in its journal Ekonomia.
Volume (Year): 3 (1999)
Issue (Month): 1 (summer)
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- F31 - International Economics - - International Finance - - - Foreign Exchange
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