Information transmission in the foreign exchange market: evidence from India

The present study sets out to examine the volatility and the resulting spillovers in the spot and futures prices of four different currency pairs (USD/INR, EUR/INR, GBP/INR, and JPY/INR) traded on the National Stock Exchange (NSE). The study employs the GARCH model to analyse volatility in the Indian currency futures market. The Reserve Bank of India (RBI) website provides spot prices, while the NSE provided daily futures prices for the specified currency pairings from 2010 to 2023 comprise the sample data. The GARCH-BEKK model investigates the transfer of volatility between spot and futures prices. The results highlight the importance of the GARCH model, demonstrating that the conditional variance exhibits slow mean-reverting behaviour and takes a considerable amount of time to subside. The study also shows that past and future innovations, as well as cross-volatility effects, significantly impact spot market volatility, suggesting the cross-market volatility transmission from the future prices to spot prices are greater than the cross-market volatility transmission within the spot series.