CBDC uncertainty: Financial market implications

Kwamie Dunbar

International Review of Financial Analysis, 2023, vol. 87, issue C

Abstract: The current state of the art in the central bank digital currency (CBDC) literature views indexes constructed from digital currency news to be fully informed about CBDC uncertainty and its impact on the financial system. We argue that the hedging behavior of participants in the currency futures market could be more informative than CBDC uncertainty news in the presence of limited risk absorption capacity in futures markets. We show that the hedging factor has a statistically significant effect on financial market risk aversion and measures of uncertainty. The hedging behavior of currency futures market participants is informative of agents' reactions to the news and central bank policies around CBDC. Our results also show that CBDC uncertainty is a significant risk transmitter in the financial system. Hence, this characteristic makes the hedging factor even more important because it can directly impact risk aversion via its moderating effects, which later influence CBDC uncertainty.

Keywords: Currency futures; CBDC; Financial market spillover; Crypto assets (search for similar items in EconPapers)
JEL-codes: C43 C58 E20 G12 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:87:y:2023:i:c:s1057521923001230

DOI: 10.1016/j.irfa.2023.102607

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