IMF Working Papers Volume 2003 Issue 001: Testing the Informational Efficiency of OTC Optionson Emerging Market Currencies (2003)

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Testing the Informational Efficiency of OTC Optionson Emerging Market Currencies

Author:

Mr. Jorge A Chan-Lau

Mr. Jorge A Chan-Lau
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and

Mr. Armando Méndez Morales

Mr. Armando Méndez Moralesnull

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Series:: IMF Working Papers

Volume/Issue:: Volume 2003: Issue 001

Language:: English

Publication Date:: 01 Jan 2003

DOI:: https://doi.org/10.5089/9781451841657.001

ISBN:: 9781451841657

ISSN:: 1018-5941

Pages:: 32

Keywords:: WP; currency; dollar; market; Polish zloty; Currency options; efficient markets; Czech Republic; Poland; GMM; option volatility; option market; market development; koruna currency market; exchange rate volatility; markets currency; OTC derivatives market; koruna market; USD dollar currency option; currency option volatility; zloty currency market; use currency option; Currency markets; Currencies; Exchange rates; Options; Asset prices; Eastern Europe

Legal-disclaimer:: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Series:: IMF Working Papers

Volume/Issue:: Volume 2003: Issue 001

Language:: English

Publication Date:: 01 Jan 2003

DOI:: https://doi.org/10.5089/9781451841657.001

ISBN:: 9781451841657

ISSN:: 1018-5941

Pages:: 32

Keywords:: WP; currency; dollar; market; Polish zloty; Currency options; efficient markets; Czech Republic; Poland; GMM; option volatility; option market; market development; koruna currency market; exchange rate volatility; markets currency; OTC derivatives market; koruna market; USD dollar currency option; currency option volatility; zloty currency market; use currency option; Currency markets; Currencies; Exchange rates; Options; Asset prices; Eastern Europe

Legal-disclaimer:: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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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.

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IMF Working Papers

ISSN:: 1018-5941

Publisher:: International Monetary Fund

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