BIMTECH Business Perspectives
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Karthika P. Devan*, Johney Johnson** and Tom Jacob***

First Published 16 Dec 2022.
Article Information Volume 3 Number 2 (Suppl) December 2022 December 2022 (Suppl)


* Research scholar, School of Management and Business Studies, Mahatma Gandhi University, Kottayam. E-mail: (Corresponding Author)
** Professor and Dean, School of Management and Business Studies, Mahatma Gandhi University, Kottayam.
*** Assistant Professor, Christ College, Irinjalakuda.


The study empirically analyses the interdependence and price discovery mechanism between the spot and futures (S&F) prices of the Indian Foreign Exchange Market. Daily closing prices of S&F currency pairs were collected from February 2010 to March 2021. Before investigating causality, the descriptive statistical test and unit root test (augmented Dickey–Fuller) are used to test the stationarity of data. An error correction model examines the long- and short-run relationship between S&F market currency pairs. The currency returned series stationarity at I(1) identified the presence of heteroscedasticity and found the absence of the Autoregressive Conditional Heteroskedasticity effect. To avoid the possible ignorance of the long-run relationship between S&F and to confirm the trustworthiness of regression at levels, the cointegration technique was employed under Johansen’s technique. The existence of cointegration at levels provides power to use Vector Error Correction Models, considering the level and difference in the estimation process. There is a long-run equilibrium relationship between spot rates and future rates, with a bidirectional causal association among currency S&F prices of all the currency pairs. Additionally, the futures market tends to regulate any new data quicker than the spot market. It suggests that spot price is led by future price, thus contributing substantially to the price-discovery process. The Generalized Autoregressive Conditional Heteroskedasticity models establish persistence in volatility, and the bad news gives rise to more volatility as compared to good news.



Foreign exchange market; spot and futures prices; Vector Error Correction Models (VECM)

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