Return and volatility spillovers: evidence from Indian exchange rates

Abstract

This study examines the nature of interdependence, and return and volatility spillovers, for three Indian exchange rates: US dollar (USD), Euro and British Pound. We use the spillover index methodology of Diebold and Yilmaz (2009) to analyse precisely and independently the returns and volatility spillovers. We also computed the return and volatility spillover indices over the 100-days rolling sub-sample windows. The empirical evidence suggests that there is a significant contemporaneous relationships among the three exchange rate returns series and the three conditional volatility series. Spillover results suggest that the INR-Euro exchange rate contributes to INR-Pound rates, in terms of both return and volatility spillovers. INR-USD rates are largely unaffected by innovations in other exchange rates. The results of spillover index reveal that a shock in the economy (high foreign institutional flows, foreign direct investment, recession, etc.) is reflected in returns as well as volatility of the index.