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Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies?

Author

Listed:
  • Christian Jochum

    (International Monetary Fund)

  • Laura Kodres

    (International Monetary Fund)

Abstract

Recent interest in futures contracts on emerging market currencies has raised concerns among some central bank authorities about their ability to maintain stable currencies. This paper presents empirical results examining the influence of the Mexican peso, the Brazilian real, and the Hungarian forint futures contracts on the respective spot markets. While measures of linear dependence and feedback indicate strong connections between the respective markets, futures volatility does not significantly explain spot market volatility, nor does it increase after futures introductions. To account for the characteristics of the spot and futures returns, a SWARCH model is employed to estimate volatility.

Suggested Citation

  • Christian Jochum & Laura Kodres, 1998. "Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies?," IMF Staff Papers, Palgrave Macmillan, vol. 45(3), pages 486-521, September.
    • Handle: RePEc:pal:imfstp:v:45:y:1998:i:3:p:486-521
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    Citations

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    Cited by:

    1. Jahangir Sultan, 2012. "Options on federal funds futures and interest rate volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(4), pages 330-359, April.
    2. Lourdes Treviño, 2005. "Development and volume growth of organized derivatives trade in emerging markets," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(2), pages 31-82, November.
    3. Röthig, Andreas, 2004. "Currency Futures and Currency Crises," Darmstadt Discussion Papers in Economics 136, Darmstadt University of Technology, Department of Law and Economics.
    4. Calvet, Laurent & Gonzalez-Eiras, Martín & Sodini, Paolo, 2004. "Financial Innovation, Market Participation, and Asset Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(3), pages 431-459, September.
    5. Kutan, Ali M. & Shi, Yukun & Wei, Mingzhe & Zhao, Yang, 2018. "Does the introduction of index futures stabilize stock markets? Further evidence from emerging markets," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 183-197.
    6. Syarifuddin, Ferry, 2020. "Macroeconomic Consequences of Foreign Exchange Futures Market for Inflation Targeting Economies," MPRA Paper 104810, University Library of Munich, Germany.
    7. Chen, Hongyi & Cao, Shuo, 2019. "Exchange Rate Movements and Fundamentals: Impact of Oil Prices and the People’s Republic of China’s Growth," ADBI Working Papers 938, Asian Development Bank Institute.
    8. Tremblay, Rodrigue, 2000. "Les facteurs déclencheurs des crises financières internationales," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(3), pages 423-436, septembre.
    9. Ferry Syarifuddin, 2020. "Macroeconomic Consequences Of Foreign Exchange Futures," Working Papers WP/14/2020, Bank Indonesia.
    10. Kirrane, Chris, 2018. "What Caused the Asian Currency?," MPRA Paper 93643, University Library of Munich, Germany.
    11. Philip Turner, 2012. "Summary of the discussion," BIS Papers chapters, in: Bank for International Settlements (ed.), Financial sector regulation for growth, equity and stability, volume 62, pages 141-142, Bank for International Settlements.
    12. Rizal A Djaafara, 2011. "Comments on Park and Shin's paper "Internationalisation of currency in East Asia: implications for regional monetary and financial cooperation"," BIS Papers chapters, in: Bank for International Settlements (ed.), Currency internationalisation: lessons from the global financial crisis and prospects for the future in Asia and the Pacific, volume 61, pages 198-201, Bank for International Settlements.
    13. Antoniou, Antonios & Koutmos, Gregory & Pericli, Andreas, 2005. "Index futures and positive feedback trading: evidence from major stock exchanges," Journal of Empirical Finance, Elsevier, vol. 12(2), pages 219-238, March.
    14. Röthig, Andreas, 2004. "Currency futures and currency crises," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 4022, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    15. Hou, Yang & Li, Steven, 2014. "The impact of the CSI 300 stock index futures: Positive feedback trading and autocorrelation of stock returns," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 319-337.
    16. T. K. Dhaneesh Kumar & B. G. Poornima & P. K. Sudarsan, 2017. "Effectiveness of Currency Futures Market in India: An Empirical Investigation," IIM Kozhikode Society & Management Review, , vol. 6(2), pages 196-203, July.
    17. Kirrane, Christopher, 2018. "The Causes of Asian Currency Crises," MPRA Paper 89103, University Library of Munich, Germany.
    18. Arif Oduncu & Yasin Akcelik & Ergun Ermisoglu, 2013. "Reserve Options Mechanism : A New Macroprudential Tool to Limit the Adverse Effects of Capital Flow Volatility on Exchange Rates," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 13(3), pages 45-60.
    19. Ashish Kumar, 2015. "Impact of Currency Futures on Volatility in Exchange Rate," Paradigm, , vol. 19(1), pages 95-108, June.

    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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