Testing the Informational Efficiency of OTC Optionson Emerging Market Currencies

Jorge Chan-Lau and Armando Méndez Morales

No 2003/001, IMF Working Papers from International Monetary Fund

Abstract: 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.

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 (search for similar items in EconPapers)
Pages: 32
Date: 2003-01-01
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