A Critical Evaluation of Volatility in Indian Currency Market

Abstract

The paper is aimed at examining the impact of introduction of currency derivatives on exchange rate volatility of Euro. The data used in this paper comprises of daily exchange rate of Euro in terms of Indian rupees for the sample period April 2005 to March 2015. To explore the time series properties Unit Root Test and ARCH LM test have been employed and to study the impact on underlying volatility GARCH (1, 1) model has been employed. The results indicate that the introduction of currency futures has not been successful in reducing the volatility of the foreign exchange market in India.

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