An Investigation of Price Discovery and Volatility Spillovers in India's Foreign Exchange Market

In a period of strong upheavals in India's foreign exchange market, the present study investigates the price discovery and volatility spillovers between spot and futures prices of four major international currencies traded on two trading platforms in India. The price discovery results confirm the long-run equilibrium relationship between spot and futures prices of sample currencies. The volatility spillover results indicate the presence of short and long-run volatility spillovers between futures and spot markets. Volatility spillovers are stronger from futures to spot in the short-run while inverse is the case in the long-run. Based on the results, it can be concluded that in India's foreign exchange market, it is the futures price which assimilates new market information more quickly in its price than spot, while, inverse is found in the long-run. Several policy implications on the role of futures and spot markets are analyzed and discussed