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On Monetary Analysis of Derivatives

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Author Info

  • Paolo Savona
  • Aurelio Maccario
  • Chiara Oldani

Abstract

Financial derivatives are products whose price is linked with that of an underlying asset. The relationship between these two prices has been studied in depth, and the following conclusions have been reached: (1) the volatility of underlying asset's price decreases after the introduction of derivatives, (2) the price discovery effect improves, (3) the liquidity of the underlying asset's market increases, (4) the bid-ask spread decreases together, and (5) the noise component of prices decreases. Those results are microeconomic and are not coherent with a macroeconomic analysis of derivatives. Derivatives tend to change the effectiveness of monetary policy actions by modifying the instruments that can be used. Derivatives have a monetary nature that has not been yet recognized by central banks and international organizations such as the International Monetary Fund and the Bank for International Settlements. This monetary nature can be evident by testing the relationship between derivatives and the interest rate. The consciousness of the monetary nature of derivatives would impose the quantification of transactions at least by the institutions that hold them, such as banks and other financial operators, and consequently by national authorities. Copyright Kluwer Academic Publishers 2000

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File URL: http://hdl.handle.net/10.1023/A:1008365625388
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Bibliographic Info

Article provided by Springer in its journal Open Economies Review.

Volume (Year): 11 (2000)
Issue (Month): 1 (August)
Pages: 149-175

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Handle: RePEc:kap:openec:v:11:y:2000:i:1:p:149-175

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Web page: http://www.springerlink.com/link.asp?id=100323

Related research

Keywords: derivatives; interest rates; innovation; monetary aggregates; monetary policy; international money;

References

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  1. Hentschel, Ludger & Smith, Clifford Jr., 1997. "Derivatives regulation: Implications for central banks," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 305-346, October.
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  4. Jegadeesh, Narasimhan & Pennacchi, George G, 1996. "The Behavior of Interest Rates Implied by the Term Structure of Eurodollar Futures," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 426-46, August.
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Citations

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Cited by:
  1. Alberto Predieri, 2000. "New Financial Architectures and Legal Infrastructures: Toward a Corrected and Compensated International Monetary System," Open Economies Review, Springer, vol. 11(1), pages 205-234, August.
  2. Chiara Oldani, 2005. "An Overview of the Literature about Derivatives," Macroeconomics 0504004, EconWPA.
  3. Chiara Oldani, 2006. "money demand and futures," ISAE Working Papers 69, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
  4. Oldani, Chiara & Savona, Paolo, 2005. "Derivatives, Fiscal Policy and Financial Stability," MPRA Paper 36199, University Library of Munich, Germany.
  5. Assoc. Prof. Roxana Angela Calistru Ph. D, Assoc. Prof. Carmen Costuleanu Ph. D, 2011. "The Impact Of Derivatives On Market Functioning," Annals of University of Craiova - Economic Sciences Series, University of Craiova, Faculty of Economics and Business Administration, vol. 4(39), pages 138-141, May.
  6. L. Arturo Bernal Ponce & Francisco Venegas Martínez, 2011. "Impacto de los productos derivados los objetivos de política monetaria: un modelo de equilibrio general," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 26(2), pages 187-216.

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