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Currency Futures and Currency Crises

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Author Info
Andreas Röthig () (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))

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Abstract

Since financial derivatives are key instruments for risk taking as well as risk reduction, it is only straightforward to examine their role in currency crises. This paper addresses this issue by investigating the impact of currency futures trading on the underlying exchange rates. After a discussion of trading mechanisms and trader types, the linkage between futures trading activity and spot market turbulence is modelled using a VAR-GARCH approach for the exchange rates of Australia, Canada, Japan, Korea and Switzerland in terms of the US dollar. The empirical results indicate that there is a positive relationship between currency futures trading activity and spot volatility. Moreover, in the case of four out of the total of five currencies discussed in this paper, futures trading activity adds significantly to spot volatility.

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Publisher Info
Paper provided by Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology) in its series Darmstadt Discussion Papers in Economics with number 136.

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Length: 40 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:tud:ddpiec:136

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Related research
Keywords: Currency crises; Exchange rate volatility; Currency futures trading activity; VAR-GARCH estimation.;

Find related papers by JEL classification:
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
F31 - International Economics - - International Finance - - - Foreign Exchange
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Shastri, Kuldeep & Sultan, Jahangir & Tandon, Kishore, 1996. "The impact of the listing of options in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 15(1), pages 37-64, February. [Downloadable!] (restricted)
  2. Eric Ghysels & Junghoon Seon, 2000. "The Asian Financial Crisis: The Role of Derivative Securities Trading and Foreign Investors," CIRANO Working Papers 2000s-11, CIRANO. [Downloadable!]
  3. Laura E. Kodres & Christian Jochum, 1998. "Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies?," IMF Working Papers 98/13, International Monetary Fund.
  4. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59. [Downloadable!] (restricted)
  5. BAUWENS, Luc & DEPRINS, Dominique & VANDEUREN, Jean-Pierre, 1997. "Modelling interest rates with a cointegrated VAR-GARCH model," CORE Discussion Papers 1997080, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  6. Eaker, Mark R. & Grant, Dwight M., 1987. "Cross-hedging foreign currency risk," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 85-105, March. [Downloadable!] (restricted)
  7. Christian Jochum & Laura Kodres, 1998. "Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies?," IMF Staff Papers, Palgrave Macmillan Journals, vol. 45(3), pages 4. [Downloadable!] (restricted)
  8. Kumar, Praveen & Seppi, Duane J, 1992. " Futures Manipulation with "Cash Settlement."," Journal of Finance, American Finance Association, vol. 47(4), pages 1485-502, September. [Downloadable!] (restricted)
  9. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-96, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Peter Flaschel & Christian Proano & Willi Semmler, 2006. "Currency Crises and Monetary Policy in Economies with Partial Dollarisation of Liabilities," IMK Working Paper 05-2006, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute. [Downloadable!]
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