Working Paper

Volatility Spillover in the Foreign Exchange Market: The Indian Experience

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We find evidences of significant volatility co-movements and/ or spillover from different financial
markets to forex market for Indian economy. Among a large number of variables examined, volatility
spillovers from stock market, government securities market, overnight index swap, Ted spread and
international crude oil prices to the foreign exchange market are found to be most important. Empirical
findings also indicate that the volatility spillover differed across variables in terms of their influence
through shocks and in terms of lagged volatility (persistence) coefficients. There are evidences of
asymmetric reactions in the forex market volatility. Comparisons between pre-crisis and post-crisis
periods indicate that the reform measures and changes in financial markets microstructure during the
crisis period had significant impact on volatility spillover. During the post-crisis period, it is the past
volatility (persistent or fundamental) changes, rather than the temporary shocks, that had significant
spillover effect on forex volatility. There are evidences of decline in asymmetric response in the forex
market during the post-crisis period for the Indian economy.


Saurabh Ghosh


Publication Date
JEL Classification
C51, F31, G13