Return and volatility spillovers between currency and bond markets in India

ABSTRACT

This paper examines the return and volatility spillovers between the foreign exchange and bond markets of India using a bivariate asymmetric BEKK-GARCH (1,1) model for the period 4 April 2005 to 31 March 2017. We find the evidence of bidirectional return and volatility spillovers with asymmetric effects between these two markets. The spillovers are evidenced even during the periods when foreign portfolio investments in the Indian bond markets were relatively low suggests the existence of strong inter-linkages between both the markets.

KEYWORDS:

• Exchange rate
• bond yield
• volatility
• spillover
• MGARCH

JEL CLASSIFICATION:

• F31
• G12
• G15
• C58

Acknowledgments

The authors sincerely thank two anonymous referees and Shri Rajeev Jain, Director, RBI for their valuable comments and suggestions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Volatility is calculated by taking the standard deviation of daily returns of the exchange rate and daily changes in bond yields.

2. 1 basis point = 1/100th of a per cent.

3. As per the Bai–Perron structural break test for the three variables, viz., DER, D5YR and D10YR, we do not find any statistically significant break in any of the series.

4. Volatility tends to increase more in response to bad news than good news which is captured through the asymmetric responses.

5. The results of unit root tests are not reported for the sake of brevity.

6. A Granger causality test between daily exchange rate return and changes in yields confirms their two-way causal relationship. The results are not reported here for the sake of brevity and available upon request.

Additional information

Notes on contributors

Sudarsana Sahoo

Sudarsana Sahoo is a research scholar at Humanities and Social Sciences Department, Indian Institute of Technology Bombay, Powai, Mumbai 400076, Maharashtra, India. Tel: [phone], E-mail: [email protected] (corresponding author). He is a post-graduate in finance and holds FRM® and CAIIB. He is currently working as a Member of Faculty at Reserve Bank Staff College, Chennai. His areas of interest include financial markets, financial economics and financial sector regulation.

Harendra Behera

Harendra Behera is assistant adviser (Economist) in the Monetary Policy Department of Reserve Bank of India, Fort, Mumbai 400001, E-mail: [email protected]. He had also worked as an assistant professor for 1 year at Indian Institute of Technology Madras, India. He received his PhD and Master of Economics from the University of Hyderabad in India and his PhD thesis won the International Economic Development Research Annual (IEDRA) Award of the Export–Import Bank of India. He has published several articles in the areas of financial market, monetary policy and open macroeconomics.

Pushpa Trivedi

Pushpa Trivedi is professor and institute chair professor at Humanities and Social Sciences Department, Indian Institute of Technology Bombay, Powai, Mumbai 400076, Maharashtra, India., E-mail: [email protected]. She has completed her post-graduation and obtained her doctoral degree in Economics from University of Mumbai. She obtained her postdoctoral degree from Princeton University. Her research interests are in Open-economy Macroeconomics, Environmental Economics, International Trade and Finance, Indian Economy, Infrastructure Planning and Policies, and Productivity: Measurement, Comparisons and Determinants.