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CBDC uncertainty: Financial market implications

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  • Dunbar, Kwamie

Abstract

The current state of the art in the central bank digital currency (CBDC) literature views indexes constructed from digital currency news to be fully informed about CBDC uncertainty and its impact on the financial system. We argue that the hedging behavior of participants in the currency futures market could be more informative than CBDC uncertainty news in the presence of limited risk absorption capacity in futures markets. We show that the hedging factor has a statistically significant effect on financial market risk aversion and measures of uncertainty. The hedging behavior of currency futures market participants is informative of agents' reactions to the news and central bank policies around CBDC. Our results also show that CBDC uncertainty is a significant risk transmitter in the financial system. Hence, this characteristic makes the hedging factor even more important because it can directly impact risk aversion via its moderating effects, which later influence CBDC uncertainty.

Suggested Citation

  • Dunbar, Kwamie, 2023. "CBDC uncertainty: Financial market implications," International Review of Financial Analysis, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finana:v:87:y:2023:i:c:s1057521923001230
    DOI: 10.1016/j.irfa.2023.102607
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    Cited by:

    1. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2023. "Predictability of crypto returns: The impact of trading behavior," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
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    3. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2023. "Predicting inflation expectations: A habit-based explanation under hedging," International Review of Financial Analysis, Elsevier, vol. 89(C).

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    More about this item

    Keywords

    Currency futures; CBDC; Financial market spillover; Crypto assets;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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