Abstract
The increasing globalization of economies and the concurrent increase in the risk of currency exposure has stimulated the development of new instruments to allow both investors and traders to hedge their currency risk. The expansion of these derivatives, however, has raised some concerns. This paper studies the determinants of the dynamics of exchange rate future contracts as a means to identify the sources of such concerns. By using a mean-exponential generalized autoregressive conditional heteroskedasticity (M-EGARCH) model for five different future contract lengths and six developed economies, it is found that an M-EGARCH(1,1) effectively describes the exchange rate futures' daily dynamic. Sign, size, and persistence effects on the volatility of future contracts are all significant, thus providing important information to both policy makers and market participants.
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Aguirre, M.S., Saidi, R. Volatility behavior of exchange rate future contracts. Atlantic Economic Journal 28, 396–411 (2000). https://doi.org/10.1007/BF02298393
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DOI: https://doi.org/10.1007/BF02298393