The currency futures market and interbank foreign exchange trading

Information and volatility in futures and spot markets: The Case of the Japanese yen

“…The evidence on whether futures trading increases spot market volatility has been mixed, especially for equity indices such as the S&P 500 (Santoni, 1987;Edwards, 1988;Harris, 1989;Darrat and Rahman, 1995). In contrast, the evidence on the impact of currency futures trading has generally been unfavorable (Clifton, 1985;Grammatikos and Saunders, 1986;Chatrath, Ramchander, and Song, 1996). The issue of the impact of futures trading remains important, as can be gauged by the continuing debate on whether or not futures markets need further regulation.…”

Futures Trading and Spot Market Volatility: Evidence from Indian Commodity Markets

“…Chang et al (2000) decomposed spot volatility estimates into expected and unexpected components and found that hedging activity in futures increases when unexpected volatility increases but speculative activity is not pretentious by the volatility. In currency market, Clifton (1985), Chatrath (1996), Grammatikos and Saunders (1986) and McCarthy and Najand (1993) positive correlation was found between spot price variability and volume of futures trading. However, Adrangi and Chatrath (1998) and Sarwar (2003) establish stabilizing effect of futures trading on currency market.…”

“…There are many studies which talk about this that futures trading may de-stabilize the spot market by making them more volatile (Cox, 1979;Figlewski, 1981;Clifton;Grammatikos and Saunders, 1986;McCarthy and Najand, 1993;Chatrath et al, 1996).On the other hand there is a divergent view on this stating that derivatives market stabilizes the spot market (Danthine, 1978;Kyle's, 1985, andFroot andPerold, 1991). Morgan (1999) concluded that the level of inventories held in the spot market will be determined by the basis and will ensure a more efficient process of private storage, which in turn, ensures a smoother pattern of prices in the spot market hence stabilise the market.…”

Impact of Currency Futures on Volatility in Exchange Rate

“…One way is to compare the spot market volatility before the introduction of the futures and after the introduction of futures (Bologna & Cavallo, 2002;Edwards, 1988;Jochum & Kodres, 1998;Shastri, Sultan & Tandon, 1996). Yet another approach can be examining the effect of futures trading volumes on the exchange rate volatility by using trading volumes as an independent variable as done in some of the prominent studies (Adrangi & Chatrath, 1998;Bessembinder & Seguin, 1992;Bhargava & Malhotra, 2007;Chatrath, Ramchander & Song, 1996;Clifton, 1985;Gulen, Huseyin & Mayhew, 2000;Rothig, 2004). The present study makes use of the first methodology for investigating the effect of currency futures trading on the volatility in the spot exchange rates as it strives to match volatility in the exchange rates before and after the introduction of currency futures in the chosen pair of currency, that is, euro/INR.…”

“…Some of these studies have produced empirical evidences that volatility has risen with the start of currency futures, while several other studies contradict the result or have mixed observations. Clifton (1985) in his study for Deutsche Mark, Swiss Franc, Canadian Dollars and Japanese Yen brings out the evidence that futures trading and volatility in exchange rates are positively related with each other. Grammatikos and Saunders (1986) too in their study for the observed study period from 1978 to 1983 find a feedback causal relationship between volume and price volatility in futures market.…”