Systematic jump risks in a small open economy: simultaneous equilibrium valuation of options on the market portfolio and the exchange rate

Article Abstract:

The valuation of stock options and currency options has witnessed an explosion of new development in the past 20 years. These models, set up either in a partial equilibrium or a general equilibrium framework, have certainly enriched our understanding of option valuation in one way or the other. However, the main drawback of these models is that stock options and currency options are analyzed in separate contexts. The co-movement of the stock market and the currency market is absent from the option valuation analysis. Such co-movement is extremely important and is best illustrated by the Southeast Asian financial crisis. To overcome this drawback, this paper uses an equilibrium model to investigate the joint dynamics of the exchange rate and the market portfolio in a small open monetary economy with jump-diffusion money supplies and aggregate dividends. It is shown that the exchange rate and the market portfolio are strongly correlated since both are driven by the same economic fundamentals. Furthermore, options on the exchange rate and the market portfolio are evaluated in the same equilibrium context. The analysis shows that parameters describing the same economic fundamentals have very different effects on currency and stock options [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: F31 Keywords: Open economy; General equilibrium; Market portfolio; Exchange rate; Options; Jumps; Siegel's paradox

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Privatization, political risk and stock market development in emerging economies

Article Abstract:

This paper investigates whether privatization in emerging economies has a significant indirect effect on local stock market development through the resolution of political risk. We argue that a sustained privatization program represents a major political test that gradually resolves uncertainty over political commitment to a market-oriented policy as well as to regulatory and private property rights. We present evidence suggesting that progress in privatization is indeed correlated with improvements in perceived political risk. Our analysis further shows that changes in political risk in general tend to have a strong effect on local stock market development and excess returns in emerging economies. We conclude that the resolution of political risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies. [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: G18, F30 Keywords: Emerging economies; Privatization; Political risk; Stock markets

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The foreign-exchange costs of central bank intervention: evidence from Sweden

Article Abstract:

This study presents evidence on risk-adjusted profits for the Swedish central bank. Estimated profits can be quite sensitive as to whether rates of return are risk-adjusted or not, and how the risk-adjustment is done. Various ways of adjusting for abnormal returns, and extracting buy--sell signals, are tried. Results, on daily data, support the view that Riksbank intervention did not make risk-adjusted losses over the period 1986-1990. The results might be challenged as arising from inappropriate risk adjustment. [C] 2001 Elsevier Science Ltd. All rights reserved. JEL classification: F31 Keywords: Foreign-exchange intervention; Foreign-exchange markets; Central bank intervention; Central bank profits

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