Forward Exchange, Futures Trading, and Spot Price Variability: A General Equilibrium Approach

Paul Weller and Makoto Yano

Econometrica, 1987, vol. 55, issue 6, 1433-50

Abstract: The authors investigate the effect of opening a forward or futures market on spot price or real exchange rate variab ility in a two-agent, two-good, two-state, general-equilibrium model. This is shown to depend upon such familiar parameters as substitutio n elasticities, marginal propensities to consume, and degress of risk aversion. The analysis highlights the importance of the income trans fer, which occurs as a result of capital gains and losses in the forw ard market. The authors find some presumption in favor of the view th at opening a forward market reduces spot price variability. The presu mption is strengthened the less risk averse are agents. Copyright 1987 by The Econometric Society.

Date: 1987
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