An Analysis of Dynamic Spillover in India’s Forex Derivatives Markets

Abstract

This chapter uses multivariate GARCH models to study volatility spillovers in foreign exchange markets. The study is based on daily data of futures and spot of four exchange rates viz., EURO/INR, GBP/INR, USD/INR and JPY/INR, traded on NSE and MCX-SX for the period February 2010 to November 2014. The main objective is to examine the dynamic spillover in India’s forex derivatives markets. The study suggests that the static spillover analysis explicitly categorizes the sample exchange rates into net transmitters and net receivers. The dynamic spillover analysis shows periods wherein the roles of emitters and recipients of return and volatility spillovers can be interrupted or even reversed. Thus, even if some commonalities appear in each identified category of exchange rates, such commonalities are event specific and time dependent.