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Currency Futures and Currency Crises

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  • Röthig, Andreas

Abstract

Since financial derivatives are key instruments for risk taking as well as risk reduction, it is only straightforward to examine their role in currency crises. This paper addresses this issue by investigating the impact of currency futures trading on the underlying exchange rates. After a discussion of trading mechanisms and trader types, the linkage between futures trading activity and spot market turbulence is modelled using a VAR-GARCH approach for the exchange rates of Australia, Canada, Japan, Korea and Switzerland in terms of the US dollar. The empirical results indicate that there is a positive relationship between currency futures trading activity and spot volatility. Moreover, in the case of four out of the total of five currencies discussed in this paper, futures trading activity adds significantly to spot volatility.

Suggested Citation

  • Röthig, Andreas, 2004. "Currency Futures and Currency Crises," Darmstadt Discussion Papers in Economics 136, Darmstadt University of Technology, Department of Law and Economics.
    • Handle: RePEc:zbw:darddp:dar_4022
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    References listed on IDEAS

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    Cited by:

    1. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, October.
    2. Daniel Dufourt, 2005. "La politique des économistes et l'économie des politistes à travers l'analyse des crises financières des vingt dernières années," Post-Print halshs-00397319, HAL.
    3. Ashish Kumar, 2015. "Impact of Currency Futures on Volatility in Exchange Rate," Paradigm, , vol. 19(1), pages 95-108, June.

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    More about this item

    Keywords

    Currency crises; Exchange rate volatility; Currency futures trading activity; VAR-GARCH estimation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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