An empirical examination of volatility spillover between the Indian and US swap markets

Vivek Bhargava, D.K. Malhotra, Philip Russel and Rahul Singh

International Journal of Emerging Markets, 2012, vol. 7, issue 3, 289-304

Abstract: Purpose - The purpose of this paper is to examine if the volatility in the US dollar interest rate swap market impacts the volatility of the swap rates in the Indian swap market. Design/methodology/approach - The authors use GARCH, EGARCH, and TGARCH modeling to examine volatility spillover between the US and Indian interest rate swap markets. Findings - Evidence is found of volatility transmission from the US dollar interest rate swap markets to the Indian swap markets. There is no evidence of spillover from the Indian swap markets to the US swap markets. Furthermore, the spillover impact from the US markets to the Indian markets is also asymmetric. The impact on volatility is asymmetric for one‐year swaps, but not for five‐year swaps. Practical implications - Findings from this study will also identify any arbitrage opportunities that may exist between different segments of the US dollar interest rate swap markets and help to improve interest rate swap market efficiency. Originality/value - If the financial market liberalization process in these nations has been successful in integrating their market into the pool of the world market, then a foreign investor would not demand a risk‐premium in the returns on deposits in these markets. The findings of this paper are also relevant for other emerging markets' policy makers, as they try to become more integrated in the global economy and try to resolve market inefficiencies and country risk so that obstacles to foreign investments can be removed.

Keywords: India; United States of America; Emerging markets; Financial markets; Interest rates; Interest rate swap; Arbitrage; Indian swap market (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijoemp:17468801211237054

DOI: 10.1108/17468801211237054

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