Dynamics of Currency Futures Trading and Underlying Exchange rate Volatility in India

Dhananjay Sahu


The paper is aimed at examining the impact of currency futures on exchange rate volatility of EURO after the introduction of currency futures trading in India. The data used in this paper comprises of daily exchange rate of EURO in terms of Indian rupees for the sample period January 02, 2008 to December 31, 2011. To explore the time series properties, Unit Root Test and ARCH LM test have been employed and to study the impact on underlying volatility, GJR GARCH (1, 1) model has been employed. The results indicate that the introduction of currency futures trading has had no impact on the spot exchange rate volatility of the foreign exchange market in India. Further, the results are also indicative of the fact that the importance of recent news on spot market volatility has increased and the persistence effect of old news has declined with the introduction of currency futures trading.

Keywords: Exchange Rate, Currency Futures, Forex Market Volatility, GARCH.

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ISSN (Paper)2222-1697 ISSN (Online)2222-2847

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