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Foreign Exchange Futures Trading and Spot Market Volatility in Thailand

Author

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  • Woradee Jongadsayakul

    (Department of Economics, Faculty of Economics, Kasetsart University, Bangkok 10900, Thailand)

Abstract

This paper investigates how the introduction of foreign exchange futures has an impact on spot volatility and considers the contemporaneous and dynamic relationship between spot volatility and foreign exchange futures trading activity, including trading volume and open interest in the Thailand Futures Exchange context, with the examples of the EUR/USD futures and USD/JPY futures. The results of the EGARCH (1,1) model show that the introduction of foreign exchange futures decreases spot volatility. It also increases the rate at which new information is impounded into spot prices but decreases the persistency of volatility shocks. A positive effect of unexpected trading volume and a negative effect of unexpected open interest on contemporaneous spot volatility are in line with the VAR(1) model results of the dynamic relationship between spot volatility and foreign exchange futures trading activity. With the impact on spot volatility caused by unexpected open interest rate being stronger than by unexpected trading volume, foreign exchange futures trading stabilizes spot volatility.

Suggested Citation

  • Woradee Jongadsayakul, 2024. "Foreign Exchange Futures Trading and Spot Market Volatility in Thailand," Risks, MDPI, vol. 12(7), pages 1-21, June.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:7:p:107-:d:1422966
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    References listed on IDEAS

    as
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    4. Guru, Anuradha, 2010. "Interplay Between Exchange Traded Currency Futures Markets, Spot Markets and Forward Markets: A Study on India," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 45(1), pages 111-130.
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