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

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  • Biswal, P.C.
  • Jain, Anshul

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.

Suggested Citation

  • Biswal, P.C. & Jain, Anshul, 2019. "Should central banks use the currency futures market to manage spot volatility? Evidence from India," Journal of Multinational Financial Management, Elsevier, vol. 52.
    • Handle: RePEc:eee:mulfin:v:52-53:y:2019:i::s1042444x18302330
    DOI: 10.1016/j.mulfin.2019.100596
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    Cited by:

    1. Syarifuddin, Ferry, 2020. "Macroeconomic Consequences of Foreign Exchange Futures Market for Inflation Targeting Economies," MPRA Paper 104810, University Library of Munich, Germany.
    2. Syarifuddin, Ferry & Izzulhaq, Syahid, 2020. "The Effectiveness of Futures-based Foreign Exchange Intervention: Comparative Studies of Brazil and India," MPRA Paper 104709, University Library of Munich, Germany.
    3. Yamani, Ehab, 2023. "Return–volume nexus in financial markets: A survey of research," Research in International Business and Finance, Elsevier, vol. 65(C).
    4. Zhang, Lihong & Wang, Jun & Wang, Bin, 2020. "Energy market prediction with novel long short-term memory network: Case study of energy futures index volatility," Energy, Elsevier, vol. 211(C).

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    More about this item

    Keywords

    Central Bank; Nonlinear causality; Futures; Spot; Currency; India; Volatility–Volume;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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