*Assistant Professor, Department of Management Studies, Kongu Engineering College, Perundurai, Erode, India
**Associate Professor, School of Management Studies, Anna University, Regional Center, Coimbatore, India
***Assistant Professor, Department of Management Studies, Kongu Engineering College, Perundurai, Erode, India
Online published on 1 June, 2016.
One of the key structural changes in Indian economic arena is introduction of currency futures trading in 2008. The subject of present study is to access the influence of currency futures on spot exchange rate in India. This study uses USD-INR spot exchange rate, near month currency futures trading volume and open interest data from April 2009 to March 2016 for analysing the influence of futures market on spot exchange rate. The variables are found to be stationary at level. The presence of volatility clustering in the residuals of regression estimation compels to use ARCH family models for this study. GARCH (1, 1) model found to be a superior model among all the ARCH family models in capturing the influence of currency futures trading activity on spot exchange rate returns and volatility. The result of the study shows that previous days currency futures trading activity adversely affects the spot exchange rate return and the higher trading activities in currency futures market bring volatility to the spot exchange rate.
Currency Futures, Exchange Rate, Volatility, Stationarity, GARCH Model
