We model the feedback effect of delta hedging for the spot market volatility of the forex market (dollar-yen and dollar-euro) using an economy of two types of traders, an option market maker (OMM) and an option market taker (OMT), whose exposures reflect the total outstanding positions of all option traders in the market. A different hedge ratio of the OMM and OMT leads to a net delta hedge activity that introduces market friction and feedback effects. This friction is represented by a simple linear permanent impact model for the net delta hedge volumes that are executed in the spot market. This approach allows us to derive the dependence of the spot market volatility on the gamma exposure of the trader that hedges a larger share of her delta exposure and on the market impact of the delta hedge transactions. We reconstruct the aggregated OMM's gamma exposure by using publicly available DTCC trade repository data and find that it is negative, as expected: the OMT usually buys options with either a view on the spot price or with the desire to hedge other positions and, thus, is net long on options. As the OMM provides liquidity as a service to the market, their position is reversed compared with the OMT. Our regressions show a high goodness of fit, a highly significant parameter for the gamma exposure of the OMM and, as expected, that the volatility is increased by the OMM's short gamma exposure. Quantitatively, a negative gamma exposure of the OMM of approximately -1000 billion USD (which is around what we observe from our reconstructed OMM data) leads to an absolute increase in volatility of 0.7% in EURUSD and 0.9% in USDJPY. If we assume that the hedge ratios in the two markets are the same, the difference can be directly explained by the higher market impact of a transaction in the USDJPY spot market compared to the EURUSD spot market, as the liquidity of the EURUSD spot market is higher than that of the USDJPY spot market. Our results are in line with and empirically confirm previous theoretical work on the feedback effect of delta hedging strategies on spot market volatility.
Knowing the part of currency in circulation that is used for transactions is important information for a central bank. For several countries, the share of banknotes that is hoarded or circulates abroad is sizeable, which may be particularly relevant for large-denomination banknotes. We analyse the demand for Swiss banknotes over a period starting in 1950 to 2017 and use different methods to derive the evolution of the amount that is hoarded. Our findings indicate a sizeable amount of hoarding, in particular for large denominations. The hoarding shares increased around the break-up of the Bretton Woods system, were comparatively low in the mid-1990s and have increased significantly since the turn of the millennium and the recent financial and economic crises.
The paper analyzes the impact of International Monetary Fund (IMF) programs, in conjunction with country-specific fundamentals and global factors, on the sovereign spreads in selected European emerging market economies (EMEs) from 2000 to 2016. For this purpose, we construct IMF indexes to capture the size of financial resources and the degree of implementation of IMF programs. Our sample is limited to countries belonging to the same region and having IMF programs and data on sovereign spreads over the same period. Our findings are unique in the current literature. They suggest that the size of financial resources and the degree of implementation of IMF programs matter for sovereign spreads, whereas the mere presence of IMF programs does not seem to affect them. Available IMF financial resources and a good implementation of IMF programs are associated with lower sovereign spreads in our panel. In addition, our results show that country-specific fundamentals and global factors remain the primary drivers of sovereign spreads.
