Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies?
IMF Working Papers, February 1, 1998
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Bibliographic details
- Authors: Christian Jochum, Laura E. Kodres
- Published: February 1, 1998
- Series: IMF Working Papers
Summary
- 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 has been employed to estimate volatility.
Major findings and analysis
- Strong connections between spot and futures markets are documented via measures of linear dependence and feedback.
- Futures volatility:
- Does not significantly explain spot market volatility.
- Does not increase after futures introductions.
- Volatility estimation approach:
- A SWARCH model is employed to account for the characteristics of the spot and futures returns.
Policy-relevant implications
- The empirical results suggest that the introduction of currency futures for the Mexican peso, the Brazilian real, and the Hungarian forint did not destabilize the underlying spot currencies through increased futures-driven volatility.
- Measures of market linkage (linear dependence and feedback) imply close interaction between spot and futures markets, which policymakers should monitor, but observed evidence does not support a direct destabilizing effect from futures volatility increases following introduction.
Publication and metadata
- Authors: Christian Jochum, Laura E. Kodres
- Date: February 1, 1998
- Pages: 39
- Volume: 1998
- Issue: 013
- Series: Working Paper No. 1998/013
- Stock No: WPIEA0131998
- ISBN: 9781451842975
- ISSN: 1018-5941
- Also published in Staff Papers, Vol. 45, No. 3, September 1998
- Subjects: Currencies, Currency markets, Emerging and frontier financial markets, Financial institutions, Financial markets, Futures, Futures markets, Money
- Keywords: Currencies, currency futures futures contract, Currency markets, Emerging and frontier financial markets, emerging market, emerging markets, exchange rate, Futures, futures FX, Futures markets, futures volatility, Global, Mexican peso, spot market volatility, SWARCH, volatility spillover, WP
IMF Working Paper — Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies? by Christian Jochum and Laura E. Kodres, February 1, 1998 (Working Paper No. 1998/013, Pages: 39).