Looking for contagion in currency futures markets

✍ Scribed by Chu-Sheng Tai

• Publisher: John Wiley and Sons
• Year: 2003
• Tongue: English
• Weight: 326 KB
• Volume: 23
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.10092

✦ Synopsis

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. JEL Classifications: C32; F31; G12. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark
23:957–988, 2003