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Pricing currency risk : facts and puzzles from currency boards

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  • Schmukler, Sergio L.
  • Serven, Luis

Abstract

The authors investigate the patterns and determinants of the currency risk premium in two currency boards-Argentina and Hong Kong. Despite the presumed rigidity of currency boards, currency premium is almost always positive and at times very large. Its term structure is usually upward sloping, but flattens out or even becomes inverted at times of turbulence. Currency premia differ across markets. The forward discount typically exceeds the currency premium derived from interbank rates, particularly during times of crisis. The large magnitude of these cross-market differences can be the consequence of unexploited arbitrage opportunities, market segmentation, or other risks embedded in typical measures of currency risk. The premium and its term structure depend on domestic and global factors related to devaluation expectations and risk perceptions.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2815.

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Date of creation: 31 Mar 2002
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Handle: RePEc:wbk:wbrwps:2815

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Keywords: Environmental Economics&Policies; Fiscal&Monetary Policy; Economic Theory&Research; Banks&Banking Reform; Payment Systems&Infrastructure; Environmental Economics&Policies; Fiscal&Monetary Policy; Economic Theory&Research; Macroeconomic Management; Banks&Banking Reform;

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Cited by:
  1. Christian Broda & Eduardo Levy Yeyati, 2003. "Endogenous Deposit Dollarization," Business School Working Papers, Universidad Torcuato Di Tella dieciseis, Universidad Torcuato Di Tella.
  2. Neven Valev & John A. Carlson, 2002. "Tenuous Financial Stability," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0210, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  3. Neven T. Valev & John A. Carlson, 2007. "Beliefs about Exchange-Rate Stability: Survey Evidence from the Currency Board in Bulgaria," Journal of Economic Policy Reform, Taylor and Francis Journals, Taylor and Francis Journals, vol. 10(2), pages 111-121.
  4. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk : facts and puzzles from currency boards," Policy Research Working Paper Series 2815, The World Bank.
  5. Neven Valev, 2000. "Building Monetary Credibility in a Transforming Economy," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0212, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.

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