Spread, volatility and monetary policy: empirical evidence from the Indian overnight money market
AbstractThis study uses a GARCH model to estimate conditional volatility in the Indian overnight money market during the period 1999-2006. It finds that the bid-ask spread in the overnight market was positively related to conditional volatility during 1999-2002. This relationship, however, has undergone a structural break since 2002 and lagged spread, along with conditional variance of the call rate, played an important role in determining spread during 2002-2006, indicating the improvement in market microstructure in recent years. Regarding monetary policy measures and money market volatility, the empirical findings indicate that expansionary monetary policy reduces volatility of both the weighted average call rate and the bid-ask spread. Among individual policy instruments, announcement of cash reserve ratio changes have a negative impact on the volatility of both call rate and spread. The other policy variables like Bank Rate, repo and reverse repo rates have a mixed impact on volatility of call rate and spread.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Macroeconomics and Finance in Emerging Market Economies.
Volume (Year): 2 (2009)
Issue (Month): 2 ()
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- Ashima Goyal & Sanchit Arora, 2010.
"The Indian Exchange Rate and Central Bank Action : A GARCH Analysis,"
Macroeconomics Working Papers
23016, East Asian Bureau of Economic Research.
- Goyal, Ashima & Arora, Sanchit, 2012. "The Indian exchange rate and Central Bank action: An EGARCH analysis," Journal of Asian Economics, Elsevier, vol. 23(1), pages 60-72.
- Ashima Goyal & Sanchit Arora, 2010. "The Indian exchange rate and central bank action: A GARCH analysis," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2010-009, Indira Gandhi Institute of Development Research, Mumbai, India.
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