Impact of Currency Futures on Volatility in Exchange Rate

Abstract

The present study has been carried out to study the impact of currency futures on the exchange rates volatility with respect to “euro”. The daily exchange rate values of euro vis-à-vis Indian rupee (INR) have been obtained for a period commencing from 1 January 2006 up to 30 September 2014. The time series data used in the study have been tested for stationarity by applying augmented Dicky and Fuller (ADF) test of unit root. The presence of heteroskedasticity in the residuals of return series of underlying data has been verified with autoregressive conditional heteroskedasticity Lagrange multiplier (ARCH LM) test. The volatility of the exchange rate return has been modelled with the help of generalized autoregressive conditional heteroskedasticity GARCH (1, 1) and Glosten–Jagannathan–Runkle (GJR) GARCH models. The results of GARCH models confirm that volatility is persistent and good news is causing more volatility than bad news. The difference in the volatility in the exchange rate returns during pre- and post-currency futures period has been examined with the help of various statistical tests and the results have been found to be significantly different and volatility has reduced in the post-futures period.