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On Monetary Analysis of Derivatives

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Abstract

Financial derivatives are products whose price is linked with that of an underlying asset. The relationship between these two prices has been studied in depth, and the following conclusions have been reached: (1) the volatility of underlying asset's price decreases after the introduction of derivatives, (2) the price discovery effect improves, (3) the liquidity of the underlying asset's market increases, (4) the bid-ask spread decreases together, and (5) the noise component of prices decreases. Those results are microeconomic and are not coherent with a macroeconomic analysis of derivatives. Derivatives tend to change the effectiveness of monetary policy actions by modifying the instruments that can be used. Derivatives have a monetary nature that has not been yet recognized by central banks and international organizations such as the International Monetary Fund and the Bank for International Settlements. This monetary nature can be evident by testing the relationship between derivatives and the interest rate. The consciousness of the monetary nature of derivatives would impose the quantification of transactions at least by the institutions that hold them, such as banks and other financial operators, and consequently by national authorities.

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Authors and Affiliations

  1. LUISS Guido Carli University and Guido Carli Association, Rome

    Paolo Savona, Aurelio Maccario & Chiara Oldani

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  1. Paolo Savona
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  2. Aurelio Maccario
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  3. Chiara Oldani
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Savona, P., Maccario, A. & Oldani, C. On Monetary Analysis of Derivatives. Open Economies Review 11 (Suppl 1), 149–175 (2000). https://doi.org/10.1023/A:1008365625388

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