Should central banks use the currency futures market to manage spot volatility? Evidence from India

P.C. Biswal and Anshul Jain

Journal of Multinational Financial Management, 2019, vol. 52-53

Abstract: The Reserve Bank of India has declared a policy of intervening in the retail currency futures market to manage volatility in the over-the-ounter (OTC) currency spot market, indicating its belief of underlying linkages between these two markets. This paper examines the dynamic interactions between volatility and volume across currency futures and spot markets in India. High-frequency five-minute level data for a year-long period are used to study the nonlinear symmetric and asymmetric causality (Kyrtsou–Labys, 2006) between volatility and volume within and across markets. The findings suggest that an increase (decrease) in volumes in either market causes a corresponding increase (decrease) in volatility in both markets. Specifically of interest is the observation that futures volume causes co-movement in spot market volatility. The study has implications for currency market participants, especially the Reserve Bank of India, in managing exchange rate volatility through the currency futures market.

Keywords: Central Bank; Nonlinear causality; Futures; Spot; Currency; India; Volatility–Volume (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 G18 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mulfin:v:52-53:y:2019:i::s1042444x18302330

DOI: 10.1016/j.mulfin.2019.100596

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