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Welfare Effects of Transparency in Foreign Exchange Markets: The Role of Hedging Opportunities

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  • Mr. Burkhard Drees
  • Mr. Bernhard Eckwert

Abstract

This paper studies the impact of enhanced transparency on risk sharing opportunities in the foreign exchange market and the associated implications for ex ante welfare. Transparency is measured in this model by the informational content of publicly observable signals about exchange rate developments. We find that in this model more transparency improves welfare in economies that are poorly endowed with capital and/or where investors are not very risk-averse, while welfare is reduced in economies with large capital endowments and/or where investors are highly risk-averse.

Suggested Citation

  • Mr. Burkhard Drees & Mr. Bernhard Eckwert, 2002. "Welfare Effects of Transparency in Foreign Exchange Markets: The Role of Hedging Opportunities," IMF Working Papers 2002/219, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2002/219
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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=16189
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    References listed on IDEAS

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    1. Sanford J. Grossman & Richard E. Kihlstrom & Leonard J. Mirman, 1977. "A Bayesian Approach to the Production of Information and Learning By Doing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 533-547.
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    3. Eyal Sulganik & Itzhak Zilcha, 1996. "The value of information in the presence of futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(2), pages 227-240, April.
    4. Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, vol. 91(3), pages 509-524, June.
    5. Hakansson, Nils H & Kunkel, J Gregory & Ohlson, James A, 1982. "Sufficient and Necessary Conditions for Information to Have Social Value in Pure Exchange," Journal of Finance, American Finance Association, vol. 37(5), pages 1169-1181, December.
    6. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-253, May.
    7. Orosel, Gerhard O., 1996. "Informational efficiency and welfare in the stock market," European Economic Review, Elsevier, vol. 40(7), pages 1379-1411, August.
    8. Green, Jerry R, 1981. "Value of Information with Sequential Futures Markets," Econometrica, Econometric Society, vol. 49(2), pages 335-358, March.
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    Cited by:

    1. Banerjee, Anurag N. & Seccia, Giulio, 2002. "On the "Hirshleifer effect'' of unscheduled monetary policy announcements," Discussion Paper Series In Economics And Econometrics 213, Economics Division, School of Social Sciences, University of Southampton.
    2. Udo Broll & Jack E. Wahl & Christoph Wessel, 2011. "Export, Exchange Rate Risk and Hedging: The Duopoly Case," German Economic Review, Verein für Socialpolitik, vol. 12(4), pages 490-502, November.
    3. Banerjee, Anurag N. & Seccia, Giulio, 2002. "On the "Hirshleifer effect'' of unscheduled monetary policy announcements," Discussion Paper Series In Economics And Econometrics 0213, Economics Division, School of Social Sciences, University of Southampton.
    4. Juan Hatchondo, 2004. "The value of information with heterogeneous agents and partially revealing prices," Econometric Society 2004 North American Summer Meetings 175, Econometric Society.

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    Keywords

    WP; foreign exchange market;

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