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Lead-lag relationship between futures and spot FX market in India

Author

Listed:
  • Varuna Kharbanda
  • Archana Singh

Abstract

Purpose - The purpose of this paper is to study the lead-lag relationship between the futures and spot foreign exchange (FX) market in India to understand the price discovery mechanism and the relationship between these two markets. Design/methodology/approach - The estimation of lead-lag relationship is realized in three steps. First unit root and stationarity tests (Augmented Dickey-Fuller, Phillips-Perron, and Kwiatkowski-Phillips-Schmidt-Shin) are applied to check the stationarity of the data. Second, cointegration tests (Engle and Granger’s residual based approach and Johansen’s cointegration test) are applied to determine long run relationship between the markets. Third, error correction estimation is carried out by applying Vector Error Correction Model (VECM) to determine the leading market. Findings - The study finds that there is a long run relationship between the futures and spot market where the futures market has emerged as the leading market for the four currencies studied in the paper. Originality/value - Majorly, the studies on Indian FX market limit themselves to identifying the efficiency of the market and the studies which talk about the lead-lag relationship focus on the Indian stock market. This paper enhances the existing literature on Indian FX market by exploring the less explored subject of the lead-lag relationship between futures and spot FX market in India.

Suggested Citation

  • Varuna Kharbanda & Archana Singh, 2017. "Lead-lag relationship between futures and spot FX market in India," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 13(5), pages 560-577, August.
    • Handle: RePEc:eme:ijmfpp:ijmf-01-2017-0001
    DOI: 10.1108/IJMF-01-2017-0001
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    Citations

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    Cited by:

    1. Shrestha, Keshab & Philip, Sheena & Peranginangin, Yessy, 2020. "Contributions of Crude Oil Exchange Traded Funds in Price Discovery Process," American Business Review, Pompea College of Business, University of New Haven, vol. 23(2), pages 393-407, November.
    2. Satyaban Sahoo & Sanjay Kumar, 2021. "Existence of Cointegration between the Public and Private Bank Index: Evidence from Indian Capital Market," Advances in Decision Sciences, Asia University, Taiwan, vol. 25(4), pages 152-172, December.
    3. Kumar, Satish, 2018. "Price discovery in emerging currency markets," Research in International Business and Finance, Elsevier, vol. 46(C), pages 528-536.

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