Testing the Informational Efficiency of OTC Optionson Emerging Market Currencies

By Jorge A Chan-Lau, Armando Méndez Morales

January 1, 2003

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Jorge A Chan-Lau, and Armando Méndez Morales. Testing the Informational Efficiency of OTC Optionson Emerging Market Currencies, (USA: International Monetary Fund, 2003) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper analyzes the informational efficiency of OTC currency options on the Czech koruna and the Polish zloty correcting for the volatility risk premium and errors-in-variable problems, using state-of-the-art techniques (Chernov 2001). It finds that these markets are more efficient than mature markets possibly because of higher relative participation of informed dedicated investors, which offset the effects of relative illiquidity and higher transaction costs in these countries. Moreover, implied volatilities generally anticipate the direction of volatility correctly, with a bias to overpredicting volatility increases reflecting one-sided markets.

Subject: Asset prices, Currencies, Currency markets, Exchange rates, Financial institutions, Financial markets, Foreign exchange, Money, Options, Prices

Keywords: Asset prices, Currencies, Currency, Currency markets, Currency option volatility, Currency options, Czech Republic, Dollar, Eastern Europe, Efficient markets, Exchange rate volatility, Exchange rates, GMM, Koruna currency market, Koruna market, Market, Market development, Markets currency, Option market, Option volatility, Options, OTC derivatives market, Poland, Polish zloty, USD dollar currency option, Use currency option, WP, Zloty currency market

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2003/001
Stock No:

WPIEA0012003
ISBN:

9781451841657
ISSN:

1018-5941

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