The Predictors of Foreign Exchange and Interest Rate Derivatives Turnover in Emerging and Advanced Market Economies
Kudakov, Ivan (2024)
Kudakov, Ivan
2024
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Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:amk-2024121034204
https://urn.fi/URN:NBN:fi:amk-2024121034204
Tiivistelmä
Foreign exchange (FX) and interest rate (IR) derivatives are pivotal tools of risk management, crucial to the stability of the global financial system. In advanced market economies (AMEs), which have developed financial systems and accessible capital markets, the turnover and variety of derivatives are significantly higher than in less financially sophisticated and more restricted emerging market economies (EMEs). To provide insights into the dynamics impacting derivatives usage, the factors potentially affecting the turnover in AMEs and EMEs were studied. Upon competing literature review, external liabilities, trade openness, government spending, and market capitalisation of domestic companies were chosen as variables to be studied as potentially affecting the turnover of the instruments.
With the objectives to investigate whether there is an association between the aforementioned independent variables and FX and IR derivatives turnover in AMEs and EMEs, and if so, is this association positive or negative, Seemingly Unrelated Regression (SUR) and Ordinary Least Squares (OLS) models with Newey-West HAC adjustments were run. The studied period spans from 2001 to 2022, the data were obtained from sources such as the Bank for International Settlements, the International Monetary Fund, the World Bank, etc.
The results showed a strong and positive relationship between both instruments and external liabilities across both economies. Trade openness and government spending have been determined to be strongly associated with some of the instruments’ turnover in both EMEs and AMEs, however the association was found to be negative. Market capitalisation did not have strong association with the derivatives turnover, recording only moderate relationship with FX derivatives turnover in AMEs and IR derivatives turnover in EMEs.
The findings contributed to a better understanding of how financial environment and dynamics impact derivatives markets, providing insights for policymakers and financial institutions looking to enhance market efficiency and risk mitigation strategies.
With the objectives to investigate whether there is an association between the aforementioned independent variables and FX and IR derivatives turnover in AMEs and EMEs, and if so, is this association positive or negative, Seemingly Unrelated Regression (SUR) and Ordinary Least Squares (OLS) models with Newey-West HAC adjustments were run. The studied period spans from 2001 to 2022, the data were obtained from sources such as the Bank for International Settlements, the International Monetary Fund, the World Bank, etc.
The results showed a strong and positive relationship between both instruments and external liabilities across both economies. Trade openness and government spending have been determined to be strongly associated with some of the instruments’ turnover in both EMEs and AMEs, however the association was found to be negative. Market capitalisation did not have strong association with the derivatives turnover, recording only moderate relationship with FX derivatives turnover in AMEs and IR derivatives turnover in EMEs.
The findings contributed to a better understanding of how financial environment and dynamics impact derivatives markets, providing insights for policymakers and financial institutions looking to enhance market efficiency and risk mitigation strategies.