Looking for Contagion in Currency Futures Markets

The Journal of Futures Markets, Volume 23, Issue10, Pages 957-988, 2003

Posted: 28 Feb 2021

See all articles by Chu-Sheng Tai

Chu-Sheng Tai

Texas Southern University - Department of Accounting and Finance

Date Written: August 20, 2003

Abstract

This article tests whether there are pure contagion effects in both conditional means and volatilities among British pound, Canadian dollar, Deutsche mark, and Swiss franc futures markets during the 1992 ERM crisis. A conditional version of international capital asset pricing model (ICAPM) in the absence of purchasing power parity (PPP) is used to control for economic fundamentals. The empirical results indicate that overall there are no mean spillovers among those futures markets, but they are detected during the crisis period. That is, past return shocks originating in any one of the four markets have no impact on the other three markets during the entire sample period, suggesting that these markets are weak‐form efficient. However, this weak‐form market efficiency fails to hold during the market turmoil, especially for British pound and Swiss franc, and the sources of contagion‐in‐mean effects are mainly due to the return shocks originating in three European currency futures markets. As for the contagion‐in‐volatility, it is detected for British pound only because its conditional volatility is influenced by the negative volatility shocks from Canadian dollar, Deutsche mark, and Swiss franc, with Deutsche mark playing the dominant role in generating these shocks.

Keywords: Currency futures, Contagion, Risk premium, Multivariate GARCH-M

JEL Classification: C32; F31; G12

Suggested Citation

Tai, Chu-Sheng, Looking for Contagion in Currency Futures Markets (August 20, 2003). The Journal of Futures Markets, Volume 23, Issue10, Pages 957-988, 2003, Available at SSRN: https://ssrn.com/abstract=3758630

Chu-Sheng Tai (Contact Author)

Texas Southern University - Department of Accounting and Finance ( email )

United States

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