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Volatility Models of Currency Futures in Developed and Emerging Markets

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  • John M. Sequeira

    (Department of Finance and Accounting, National University of Singapore)

  • Pang Chia Chiat

    (Department of Finance and Accounting, National University of Singapore)

  • Michael McAleer

    (Department of Economics, University of Western Australia)

Abstract

This 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 Info

Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-210.

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Length: 30 pages
Date of creation: Mar 2003
Date of revision:
Handle: RePEc:tky:fseres:2003cf210

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  1. McAleer, Michael & McKenzie, Colin, 2002. " The International Congress on Modelling and Simulation: Hamilton, New Zealand, December 1999," Journal of Economic Surveys, Wiley Blackwell, vol. 16(1), pages 111-21, February.
  2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  3. Sequeira, John M & McAleer, Michael & Chow, Ying-Foon, 2001. "Efficient Estimation and Testing of Alternative Models of Currency Futures Contracts," The Economic Record, The Economic Society of Australia, vol. 77(238), pages 270-82, September.
  4. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  5. Brenner, Robin J. & Kroner, Kenneth F., 1995. "Arbitrage, Cointegration, and Testing the Unbiasedness Hypothesis in Financial Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 23-42, March.
  6. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(04), pages 535-551, December.
  7. Bessembinder, Hendrik & Seguin, Paul J., 1993. "Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 21-39, March.
  8. Tse, Yiuman & Lee, Tae-Hwy & Booth, G. Geoffrey, 1996. "The international transmission of information in Eurodollar futures markets: a continuously trading market hypothesis," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 447-465, June.
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Cited by:
  1. Ortas, Eduardo & Moneva, José M. & Salvador, Manuel, 2012. "Does socially responsible investment equity indexes in emerging markets pay off? Evidence from Brazil," Emerging Markets Review, Elsevier, vol. 13(4), pages 581-597.
  2. Liu, Xiangli & Cheng, Siwei & Wang, Shouyang & Hong, Yongmiao & Li, Yi, 2008. "An empirical study on information spillover effects between the Chinese copper futures market and spot market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(4), pages 899-914.

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