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Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies?

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  • Christian Jochum

    (International Monetary Fund)

  • Laura Kodres

    (International Monetary Fund)

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    Abstract

    Recent interest in futures contracts on emerging market currencies has raised concerns among some central bank authorities about their ability to maintain stable currencies. This paper presents empirical results examining the influence of the Mexican peso, the Brazilian real, and the Hungarian forint futures contracts on the respective spot markets. While measures of linear dependence and feedback indicate strong connections between the respective markets, futures volatility does not significantly explain spot market volatility, nor does it increase after futures introductions. To account for the characteristics of the spot and futures returns, a SWARCH model is employed to estimate volatility.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

    Volume (Year): 45 (1998)
    Issue (Month): 3 (September)
    Pages: 486-521

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    Handle: RePEc:pal:imfstp:v:45:y:1998:i:3:p:486-521

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    Cited by:
    1. Röthig, Andreas, 2004. "Currency futures and currency crises," Darmstadt Discussion Papers in Economics 4022, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
    2. Arif Oduncu & Yasin Akcelik & Ergun Ermisoglu, 2013. "Reserve Options Mechanism:A New Macroprudential Tool to Limit the Adverse Effects of Capital Flow Volatility on Exchange Rates," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 13(3), pages 45-60.
    3. Martin Gonzalez Eiras & Laurent Calvet & Paolo Sodini, 2004. "Financial Innovation, Market Participation, and Asset Prices," Working Papers 76, Universidad de San Andres, Departamento de Economia, revised Sep 2004.
    4. Antoniou, Antonios & Koutmos, Gregory & Pericli, Andreas, 2005. "Index futures and positive feedback trading: evidence from major stock exchanges," Journal of Empirical Finance, Elsevier, vol. 12(2), pages 219-238, March.
    5. TREMBLAY, Rodrigue, 1999. "Les facteurs declencheurs des crises financieres internationales," Cahiers de recherche 9907, Universite de Montreal, Departement de sciences economiques.
    6. Lourdes Treviño, 2005. "Development and volume growth of organized derivatives trade in emerging markets," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(2), pages 31-82, November.

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