The Effects of Introducing Currency Futures on Spot Exchange Rates – A Review of Related Literature
Keywords:
Currency derivatives, Currency futures, Market bubbles, Speculative trading, Spot exchange rateAbstract
The paper reports a comprehensive review on the effects of introducing futures on the spot prices of underlying assets with specific reference to the effects of currency futures on spot exchange rates. The articles which have been published in peer reviewed international journals were collected by using databases of Wiley Online, Scopus, ProQuest, and Emerald Insight. The articles were scrutinized based on the authors’ perspective analysis (effects of introducing currency futures on spot exchange rates). The articles contributing significantly on the effects of introducing currency futures on spot exchange rates were selected for final review and various issues were identified. Despite the popular opinion that introduction of futures trading fuels added volatility in financial markets the empirical evidence regarding this topic is far from conclusive. So there is a need to review the effects of introducing currency futures on the spot market volatility in India. The insights deduced in the paper are primarily based on 42 articles selected for critical review and analysis in the domain of currency futures and hence should be interpreted only as key concerns in the area.
References
Adrangi B., Chatrath A. (1998). Futures commitments and exchange rate volatility. Journal of Business Finance and Accounting, 25(3) & (4), pp. 501-520.
Allayannis, George & Lel, Ugur & Miller, Darius P. (2012). "The use of foreign currency derivatives, corporate governance, and firm value around the world. Journal of International Economics, Elsevier, vol. 87(1), pages 65-79.
Andrea L. DeMaskey (1995). A Comparison of the Effectiveness of Currency Futures and Currency Options in the Context of Foreign Exchange Risk Management. Managerial Finance, Vol.21(4), pp.40-51.
Ankita Srivastava (2017). A review on pricing of currency futures in Indian foreign exchange market. International Journal of Economics and Business Research, Vol.13 No.2, pp.182 – 189
Anuradha Guru (2010).The Effect of Currency Trading on Volatility of Spot Exchange Returns. Indian Economic Review, Vol. 35, No.1, pp.110-130.
Awan, A., & Rafique, A. (2013). The volatility effect of single stock futures trading on Pakistani stock market. Business Review, 8 (1), 97-122.
Bhargava V., Malhotra D.K. (2007). The relationship between futures trading activity and exchange rate volatility, revisited. Journal of Multinational Financial Management, 17, pp. 95-111.
Bologna, P. and Cavallo, L. (2002). Does the introduction of Stock Index Futures Effectively Reduce Stock Market Volatility? Is the ‘Futures Effect’ Immediate? Evidence from the Italian stock exchange using GARCH, Applied Financial Economics, Vol. 12: pp.183-92.
Chatrath, A., S. Ramchander and F. Song (1996). The Role of Futures Trading Activity in Exchange Rate Volatility. The Journal of Futures Markets, Vol. 16, No. 5, pp561-584.
Chiu-Lan Chang & Ming Fang (2015). An Analysis on Trading Behaviors of Currency Futures: Evidence from BRICS Countries. Accounting and Finance Research, Vol. 4, No. 2 ,pp143-145
Christian Jochum and Laura Kodres (1998). Does the Introduction of Futures on Emerging Market Currencies Destabilize the Underlying Currencies? IMF Staff Papers, A Quarterly Journal of the IMF, Volume 45, Number 3, pp486-521
Christos Floros, Enrique Salvador, (2016). Volatility, trading volume and open interest in futures markets. International Journal of Managerial Finance, Vol. 12 Issue: 5, pp.629-653, https://doi.org/10.1108/IJMF-04-2015-0071
Clifton, Eric, (1985). The Currency Futures Market and Interbank Foreign Exchange Trading. Journal of Futures Markets, Vol. 5 (Fall), pp. 375–84.
Conrad, Jennifer, (1989). The Price Effect of Option Introduction. Journal of Finance, Vol. 44 (June), pp. 487–98.
Crain, Susan J., and Jae-Ha Lee (1995). Intraday Volatility in Interest Rate and Foreign Exchange Spot and Futures Markets. Journal of Futures Markets, Vol. 15, pp. 395–421.
Darrat A., Rahman S., Zhong M. (2002). On the role of futures trading in spot market fluctuations: Perpetrator of volatility or victim of regret? The Journal of Financial Research, Vol. XXV, No. 3, pp431-444.
Darren Butterworth (2000). The impact of introduction of the index futures trading on underlying stock index volatility in the case of the FISE Mid 250 contract. Journal of Financial Economics, Vol. 7, Pp.223-226
Detemple, Jerome, and Philippe Jorion (1990). Option Listing and Stock Returns: An Empirical Analysis, Journal of Banking and Finance, Vol. 14 (October), pp. 781–801.
Donald Lien and Fathali Firoozi (2008). Off shore Bidding and Currency futures. International Journal of Business and Economics, Vol. 7, No. 2, pp 125-136.
Figlewaski S. (1981). Futures trading and volatility in the GNMA market. The Journal of Finance, Vol. 36, No. 2, pp. 445-456.
Gahlot, R., Datta, S. K., & Kapil, S. (2010). Impact of derivative trading on stock market volatility in India: A study of S&P CNX Nifty. Eurasian Journal of Business and Economics, 3 (6), 139–149.
George Y. Jabbour (1994). Prediction of future currency exchange rates from current currency futures prices: The case of GM and JY. The Journal of Futures Markets, Volume14, Issue1, February 1994, pp25-36
Glen, J. and Jorion, P. (1993). Currency Hedging for International Portfolios. Journal of Finance, Vol. 48: pp.1865-86.
Golak Nath & Manoel Pacheco (2018). Currency futures market in India: an empirical analysis of market efficiency and volatility. Macroeconomics and Finance in Emerging Market Economies, 11:1, 47-84, DOI: 10.1080/17520843.2017.1331929.
Goyal N, Mittal A. (2014). Currency Futures Impact on the Volatility of Exchange Rate. Asian Journal of Multidimensional Research, 3(4):8-17.
Gulen H., Mayhew S. (2000). Stock index futures trading and volatility in international equity markets. The Journal of Futures Markets, Vol. 20, No. 7, pp661–685.
Hendrik Bessembinder and Paul J Seguin (1992).Futures-Trading Activity and Stock Price Volatility. Journal of Finance, 47, (5), 2015-34
Hung-Gay Fung, Gary A. Patterson (1999). The dynamic relationship of volatility, volume, and market depth in currency futures markets. Journal of International Financial Markets, Institutions & Money, Volume 9, Issue 1, pp33-59
Ira G. Kawaller Paul D. Koch Timothy W. Koch (1993). Intraday market behaviour and the extent of feedback between S & P 500 futures prices and the S & P 500 index. The Journal of Financial Research, Volume16, Issue 2, pp107-121
Jens A. Stephan and Robert E. Whaley (1990). Intraday Price Change and Trading Volume Relations in the Stock and Stock Option Markets. The journal of Finance, Volume45, Issue1, Pages 191-220
Kamara, A., T.Miller, and A.Siegel (1992). The effects of futures trading on the st ability of the S&P 500 returns. Journal of Futures Markets, (12), 645 – 658.
Kaoru Kawamoto and Shigeyuki Hamori (2011). Market efficiency among futures with different maturities: Evidence from the crude oil futures market. Journal of Futures Markets, vol. 31, issue 5, pp487-501
Klemkosky, Robert C., and Terry S. Maness, (1980). The Impact of Options on the Underlying Securities. Journal of Portfolio Management, Vol. 7 (winter), pp.12–18
Kumar, A. (2015). Impact of Currency Futures on Volatility in Exchange Rate: A Study of Indian Currency Market. Paradigm, 19 (1), pp95–108. https://doi.org/10.1177/0971890715585204
Kuntara Pukthuanthong-Le and Lee R.Thomas III (2008). Weak Form Efficiency in Currency Markets. Financial Analysts Journal, Vol 64, no.3, pp.31-52.
Lingareddy Tulsi (2009). Currency Derivatives Trading in India: Futures vs Forwards. Economic and Political Weekly Research Foundation (EPWRF) Available at http://dx.doi.org/10.2139/ssrn.1469400
Madhoo Pavaskar and Sarang Venu Kala (2013). Impact of Volatility in Rupee-Dollar Exchange Rates on Currency Futures Trading Volumes. Financial Vision, Volume 1, Issue 4, pp17-19
Malliaris, Anastasios G.; Serletis, Apostolos; Hinich, Melvin J.; and Gogas, Periklis (2010). Episodic Nonlinearity in Leading Global Currencies. Open Economies Review, 23, 2: 337-357, 2012. Retrieved from Loyola eCommons, School of Business: Faculty Publications and Other Works, http://DX.DOI.ORG/10.1007/s11079-010-9194-9
Mazouz, K. (2007). New evidence on the effect of CBOE options listing on the volatility of New York listed stocks. International Journal of Banking and Finance, 5 (1), 3
Parvez Ahmed, Kristine Beck and Elizabeth Goldreyer (2005). Moving average technical trading strategies for currencies of emerging economies. Managerial Finance, Vol. 31(5), pp.14-27.
Pilar, C. and Rafael, S. (2002). Do derivatives trading destabilize the underlying assets? Evidence from the Spanish Stock Market. Applied Economics letter, 19.
Quentin C. Chu, David K. Ding, Pyun C.S (1996). Bid-Ask Bounce and spreads in the Foreign Exchange Futures Market. Review of Quantitative Finance and Accounting, Vol.6, pp19-37.
Rita Biswas and Hany A. Shawky (1997). Foreign exchange market efficiency: Evidence from the Gulf War period. Global Finance Journal, Volume 8, Issue 2, Autumn–Winter, pp199-210.
Ross, S.A. (1989). Information and Volatility: The no-arbitrage martingale approach to timing and resolution irrelevancy. Journal of Finance, Vol. 44, pp. 1-17
Sahu D. (2012). Dynamics of Currency Futures Trading and Underlying Exchange Rate Volatility in India. Research Journal of Finance and Accounting, 2012; 3(7):15-24.
Samanta, P. and Samanta, P. (2007). Impact of future trading on underlying spot market volatility. The ICFAI journal of applied finance, 13 (10)
Sanford J. Grossman and Merton H. Miller (1998). Liquidity and Market Structure. The Journal of Finance, Volume 43, Issue3, pp617-633
Santoni, G. J. (1987). Has Programmed Trading Made Stock Prices More Volatile? Federal Reserve Bank of St. Louis Review, 18-2
Santoni, G. J. (1987). Has Programmed Trading Made Stock Prices More Volatile? Federal Reserve Bank of St. Louis Review, 18-2
Sarang VK. (2012). Evolution of Currency Future Trading and its impact on Exchange Rtae volatality in India (2000-2012). Symbosis International University, Symbosis School of Economics. Retrieved from, 2012. www.investorsareidiots.com
Saurabh Singh, Dr. L.K Tripathi (2014). A Study Of Currency Market Volatility In India During Its Pre And Post Derivative Period. International Journal of Core Engineering & Management (IJCEM), Volume 1, Issue 6, pp104-114
Saurabh Singh, Dr. L.K Tripathi (2014). A Study Of Currency Market Volatility In India During Its Pre And Post Derivative Period. International Journal of Core Engineering & Management (IJCEM), Volume 1, Issue 6, pp104-114
Shailesh Rastogi (2011). Impact of Currency Futures on Spot Market Volatility: An Empirical Study. The Indian journal of Management, Volume 4, Issue 2, pp3-8
Sharma, S., (2011). An Empirical analysis of the relationship between Currency futures and Exchange Rates Volatility in India. Working Paper Series, Reserve Bank of India, 1/2011.
Shastri, Kuldeep, Jahangir Sultan, and Kishore Tandon, (1996).The Impact of the Listing of Options in the Foreign Exchange Market. Journal of International Money and Finance, Vol. 15 (February), pp. 37–64.
T. K. Dhaneesh Kumar, B. G. Poornima, P. K. Sudarsan (2017). Effectiveness of Currency Futures Market in India: An Empirical Investigation. IIM Kozhikode Society & Management Review, Vol 6, Issue 2, Available at ,https://doi.org/10.1177/2277975217704606
Takvor H. Mutafoglu (2011). A Note on Carry Trade and Related Financial Variables. International Journal of Economics and Finance, Vol.3 (3), pp.94-98.
Theodor Kohers (1987). Testing the Rate Forecasting Consistency of Major Foreign Currency Futures. The International Trade Journal, Vol.1 (4), pp.359-370.
Thomas V. Schwarz Francis E. Laatsch (1991). Dynamic efficiency and price leadership in stock index cash and futures markets. The Journal of Futures Markets, Volume11, Issue6, pp669-683
Varuna Kharbanda, Archana Singh (2017). Lead-lag relationship between futures and spot FX market in India. International Journal of Managerial Finance, Vol. 13 Issue: 5, pp.560-577, https://doi.org/10.1108/ IJMF-01-2017-0001
