Testing the Informational Efficiency of OTC Optionson Emerging Market Currencies

Author/Editor:

Jorge A Chan-Lau ; Armando Méndez Morales

Publication Date:

January 1, 2003

Electronic Access:

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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.

Series:

Working Paper No. 03/1

Subject:

English

Publication Date:

January 1, 2003

ISBN/ISSN:

9781451841657/1018-5941

Stock No:

WPIEA0012003

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

32

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