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Option Pricing Approach to International Reserves

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  • Jaewoo Lee

Abstract

This paper brings forward the insurance aspect of holding reserves by using the conceptual equivalence between insurance and financial options, and explores when reserves are likely to become the primary means of precautionary arrangement, in particular in emerging markets. The sharp rise in the amount of reserves held by many emerging markets since the mid‐1990s can be traced to the rise in the “globalization hazard” that confronts emerging markets. A modest probability of globalization hazard (sudden stop) can induce emerging markets to self‐insure fully by hoarding international reserves, rather than relying on nonreserve alternatives of taking precautions.

Suggested Citation

  • Jaewoo Lee, 2009. "Option Pricing Approach to International Reserves," Review of International Economics, Wiley Blackwell, vol. 17(4), pages 844-860, September.
    • Handle: RePEc:bla:reviec:v:17:y:2009:i:4:p:844-860
    DOI: 10.1111/j.1467-9396.2009.00849.x
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    References listed on IDEAS

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    Cited by:

    1. Yongsung Chang & Sun-Bin Kim & Jaewoo Lee, 2013. "Accounting for Global Dispersion of Current Accounts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 477-496, July.

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