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Price discovery in emerging currency markets

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  • Kumar, Satish

Abstract

We examine the lead-lag relation between spot and futures prices in the leading emerging foreign exchange markets from September 2008 to April 2018. Using the daily data for Indian rupee, Brazilian real and South African rand against the US dollar, we find the evidence of price discovery in these currency markets. The spot market consistently leads the futures market for the Indian rupee and South African rand, however, the futures market leads the spot market for Brazilian real during the sample period. Our results further show that the cost-of-carry error correction model is the best forecasting model and a trading strategy based on this model outperforms the market even after allowing for transaction costs.

Suggested Citation

  • Kumar, Satish, 2018. "Price discovery in emerging currency markets," Research in International Business and Finance, Elsevier, vol. 46(C), pages 528-536.
    • Handle: RePEc:eee:riibaf:v:46:y:2018:i:c:p:528-536
    DOI: 10.1016/j.ribaf.2018.07.001
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    More about this item

    Keywords

    Price discovery; Lead–lag relation; Currency market; Error correction model; Cost-of-carry model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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