Testing the Informational Efficiency of OTC Optionson Emerging Market Currencies
IMF Working Papers, January 1, 2003
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- Testing the Informational Efficiency of OTC Optionson Emerging Market Currencies
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Bibliographic details
- Authors: Jorge A Chan-Lau, Armando Méndez Morales
- Published: January 1, 2003
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451841657.001
Summary and key findings
- The 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.
- Possible explanation: higher relative participation of informed dedicated investors, which offset the effects of relative illiquidity and higher transaction costs in these countries.
- Implied volatilities generally anticipate the direction of volatility correctly, with a bias to overpredicting volatility increases reflecting one-sided markets.
Methodology
- Corrections applied for the volatility risk premium and errors-in-variable problems.
- Techniques referenced: Chernov 2001 (described as state-of-the-art in the paper).
Implications and interpretive points
- Higher measured informational efficiency in these emerging market OTC options may reflect market structure characteristics (greater share of informed dedicated investors) rather than lower transaction costs or greater liquidity.
- The observed bias of implied volatilities to overpredict volatility increases is consistent with one-sided market conditions.
Publication and metadata (as provided)
- Authors: Jorge A Chan-Lau, Armando Méndez Morales
- Date: January 1, 2003
- Series: Working Paper No. 2003/001
- Issue: 001
- Volume: 2003
- Pages: 32
- DOI: https://doi.org/10.5089/9781451841657.001
- Stock No: WPIEA0012003
- ISBN: 9781451841657
- ISSN: 1018-5941
Subjects and keywords (as provided)
- Subjects: 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
This summary is based on the IMF Working Paper "Testing the Informational Efficiency of OTC Optionson Emerging Market Currencies" by Jorge A Chan-Lau and Armando Méndez Morales (January 1, 2003, Working Paper No. 2003/001).
Content in this bundle
- Testing the Informational Efficiency of OTC Options on Emerging Market Currencies - WP/03/1