Price Discovery and Volatility Transmission in Currency Spot and Futures Markets in India: An Empirical Analysis

P. Sakthivel, Krishna Chittedi and Daniel Sakyi ()

Global Business Review, 2017, vol. 20, issue 4, 931-945

Abstract: This article investigates the price discovery and volatility transmission between currency spot and futures markets in India. Daily closing currency spot and futures prices of United States dollar/Indian Rupee (USD/INR), Japanese Yen/Indian Rupee (JPY/INR), Great Britain Pound/Indian Rupee (GBP/INR) and Euro/Indian Rupee (EUR/INR) from 1 March 2010 to 20 January 2015 were used. Both long-and short-run relationship as well as volatility transmission was investigated by the use of Engle Granger co-integration test, error correction mechanism, causality test and the bivariate GARCH model. The co-integration results proved that there is a long-run relationship between currency spot and futures prices. The study finds that there is a unidirectional causal relationship from currency spot to futures prices of JPY/INR, GBP/INR and EUR/INR. Further, results conclude the bidirectional causal relationship between USD/INR currency spot and futures prices. The result further shows that the spot market adjusts to new information faster than futures market suggesting that spot price leads the futures price and contributes largely to price discovery. Finally, the results show that there is unidirectional volatility transmission from currency spot to futures prices of JPY/INR, GBP/INR and EUR/INR and bidirectional spillover between currency spot and futures prices of USD/INR. Based on the findings, relevant policy recommendations are made.

Keywords: Price discovery; volatility transmission; currency spot; currency futures; co-integration (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:sae:globus:v:20:y:2017:i:4:p:931-945

DOI: 10.1177/0972150917721834

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