An Investigation of Price Discovery and Volatility Spillovers in India's Foreign Exchange Market

Forthcoming in Journal of Economic Studies

Posted: 28 Mar 2014

See all articles by Sanjay Sehgal

Sanjay Sehgal

University of Delhi - Department of Financial Studies

Wasim Ahmad

Department of Economic Sciences, Indian Institute of Technology Kanpur, Kanpur India

Florent Deisting

ESC PAU

Date Written: March 26, 2014

Abstract

In a period of strong upheavals in India’s foreign exchange market, the present study investigates the price discovery and volatility spillovers between spot and futures prices of four major international currencies traded on two trading platforms in India. The price discovery results confirm the long-run equilibrium relationship between spot and futures prices of sample currencies. The volatility spillover results indicate the presence of short and long-run volatility spillovers between futures and spot markets. Volatility spillovers are stronger from futures to spot in the short-run while inverse is the case in the long-run. Based on the results, it can be concluded that in India’s foreign exchange market, it is the futures price which assimilates new market information more quickly in its price than spot, while, inverse is found in the long-run. Several policy implications on the role of futures and spot markets are analyzed and discussed.

Keywords: Currency futures market, Price discovery, BEKK-GARCH, DCC-GARCH, Directional spillovers, volatility spillovers

JEL Classification: G12, G13, C32

Suggested Citation

Sehgal, Sanjay and Ahmad, Wasim and Deisting, Florent, An Investigation of Price Discovery and Volatility Spillovers in India's Foreign Exchange Market (March 26, 2014). Forthcoming in Journal of Economic Studies, Available at SSRN: https://ssrn.com/abstract=2416408 or http://dx.doi.org/10.2139/ssrn.2416408

Sanjay Sehgal

University of Delhi - Department of Financial Studies ( email )

University Road
Delhi, 110 007
India

Wasim Ahmad (Contact Author)

Department of Economic Sciences, Indian Institute of Technology Kanpur, Kanpur India ( email )

IIT Kanpur
IIT Kanpur
Kanpur, 208016
India
919634725126 (Phone)

Florent Deisting

ESC PAU ( email )

3, r St John Perse
Pau, 64000
France

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