Volatility Models of Currency Futures in Developed and Emerging Markets
AbstractThis paper examines volatility models of currency futures contracts for three developed markets and two emerging markets. For each contract, standard models of the Unbiased Expectations Hypothesis (UEH) and Cost-of-Carry hypothesis (COC) are extended to derive volatility models corresponding to each of the two standard approaches. Each volatility model is formulated as a system of individual equations for the conditional variances of futures returns, spot returns and the domestic risk-free interest rate. The empirical results suggest that the conditional volatility of futures return for emerging markets is significant in explaining the conditional volatility of returns in the underlying spot market. For developed markets, however, the conditional volatility of the spot returns is significant in explaining the conditional volatility of futures returns. Moreover, it is found that the domestic risk-free interest rate has little impact on the conditional variances of the futures, spot and domestic risk-free interest rates.
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Bibliographic InfoPaper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-210.
Length: 30 pages
Date of creation: Mar 2003
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-04-02 (All new papers)
- NEP-FIN-2003-04-02 (Finance)
- NEP-FMK-2003-04-02 (Financial Markets)
- NEP-IFN-2003-04-02 (International Finance)
- NEP-RMG-2003-04-02 (Risk Management)
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