SEARCH

SEARCH BY CITATION

Abstract

The relationship between monetary policy and the behaviour of financial markets is commonly examined to assess the effectiveness of the actions of central banks. Our study explores, for the case of Mexico, the reaction of short-term interest rate futures to monetary policy announcements, and to what extent the change to the operational targeting of interest rates implemented by the central bank in 2004 led to changes in this reaction. The results show that in a market dominated by institutional investors trading solely for hedging purposes, the actions of the central bank are not fully incorporated into prices in advance. As a result, interest rate futures prices are adjusted on announcement dates. Furthermore, the change to an interest rate operational target modified the trading behaviour so that the changes in the volatility, volume and prices of the futures contracts on the announcement dates are now more evident.