We thank the valuable suggestions made by two anonymous referees and the editor Benn Steil. We are also grateful to Manuel Ramos Francia, Guillermo Benavides and the seminar participants at Banco de Mexico on 17 July 2009; Ai Jun Hou for her discussion at the 2010 Eastern Finance Association Annual Conference; and Janko Hernandez for helpful discussions and comments. Renata Herrerías gratefully acknowledges the financial support of Asociación Mexicana de Cultura A.C.
Monetary Policy Announcements and Short-Term Interest Rate Futures Volatility: Evidence from the Mexican Market†
Article first published online: 21 AUG 2012
© 2012 Blackwell Publishing Ltd
Volume 15, Issue 2, pages 225–250, Summer 2012
How to Cite
Herrerías, R. and Gurrola, P. (2012), Monetary Policy Announcements and Short-Term Interest Rate Futures Volatility: Evidence from the Mexican Market. International Finance, 15: 225–250. doi: 10.1111/j.1468-2362.2012.01303.x
- Issue published online: 21 AUG 2012
- Article first published online: 21 AUG 2012
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.