Essays on Exchange Rate Volatility in Emerging Markets

One important component of economic stability in emerging and developing economies is the management of exchange rate volatility and the smoothing of drastic or persistent movement in the currency\u27s value. This topic is of concern not only for policy makers, but also for foreign investors, local businesses and domestic households. Exchange rate volatility affects the inflation targeting goals of central banks, the wealth accumulation of individuals, investment opportunities for businesses, and economic growth overall. It is a topic that will continue to be relevant as these economies progress in integrating into the global market and investors continue seeking new ventures and opportunities beyond traditional markets. In this dissertation, I address the topic of exchange volatility in emerging markets in three segments. The first segment in my dissertation discusses how foreign currency inflows may impact exchange rate volatility, with a specific focus on remittances. I find that the level of financial development, institutional quality, trade openness, and dollarization are important components in determining how these inflows impact exchange rate volatility. Economies with high levels of dollarization experience greater volatility in exchange rates with increases in remittance flows and improvements in the level of development in the economy correspond to lower volatility derived from changes in remittance inflows. In the second segment, I study how central banks to date have tried to manage risks associated with drastic movements of their currencies. Focusing on the case study of Colombia, I analyze how Colombia\u27s approach to currency market intervention impacted exchange rate volatility to determine whether the interventions can be deemed successful. In the third segment, I develop an experimental strategy for central banks in emerging markets to use currency options as a tool for curbing volatility. I show how the hedging position based on the change in the delta of each option gives the central bank a clear approach to its optimal position in the spot market that is not disruptive nor counters the primary goal to smooth currency market volatility and that it can increase the information flow between market participants and policy makers