Working Paper: NBER ID: w10786
Authors: Ricardo J. Caballero; Stavros Panageas
Abstract: One of the most serious problems that a central bank in an emerging market economy can face, is the sudden reversal of capital inflows. Hoarding international reserves can be used to smooth the impact of such reversals, but these reserves are seldom sufficient and always expensive to hold. In this paper we argue that adding richer hedging instruments to the portfolios held by central banks can significantly improve the efficiency of the anti-sudden stop mechanism. We illustrate this point with a simple quantitative hedging model, where optimally used options and futures on the S&P100's implied volatility index (VIX), increases the expected reserves available during sudden stops by as much as 40 percent.
Keywords: No keywords provided
JEL Codes: E2; E3; F3; F4; G0; C1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inclusion of options and futures on the VIX (G13) | Expected reserves during sudden stops (C41) |
| Jump in the VIX (G17) | Probability of sudden stop (C69) |
| Sudden stops (F32) | Expected gains from hedging strategies (G13) |