Price Discovery Mechanism in FX Market of India

This study investigated the relationship between the CDS (credit default swap) market with the FX spot (FX swap) market, including the period of recent global financial crisis. A measure for market efficiency is the condition that the derivative markets dominate the asset market in price discovery. In our case, however, FX market should be leading the CDS market. We found FX (spot and Derivatives) market has co-integration relationship with CDS market. Looking at Gonzalo Granger (GG) and Hasbrouck's price discovery measure, we found the FX spot and derivatives market dominated CDS market in price discovery. This study has also examined the direction of shock spillover and volatility transmission between Korean CDS spread and Foreign exchange spot (FX swap) markets using the VECM bivariate GARCH approach. Our evidence suggested the presence of bi-directional shock volatility and volatility transmission between the CDS market and FX spot market partially exist. However, volatility spillover effects from CDS market to FX Swap market are stronger than in the reverse direction during the global financial crisis, indicating that the CDS spread signaling sovereign risk play a more important role in influencing the volatility of FX derivatives market. There are some particular features in FX market. The volatility and shock of CIP deviations reflecting arbitrage opportunities in FX swap market are influenced by those of CDS spread in tranquil period prior to Lehman failure. But after Lehman failure CDS played a crucial role in signaling credit risk in FX derivatives market. We found that higher liquidity and trading volume of market matters more in price discovery and information transmission.

Download Full-text

Asymmetric information, price discovery and macroeconomic announcements in FX market: do top trading banks know more?

International Journal of Finance & Economics ◽

10.1002/ijfe.391 ◽

2009 ◽

pp. n/a-n/a ◽

Cited By ~ 5

Author(s):

Kate Phylaktis ◽

Long Chen

Keyword(s):

Asymmetric Information ◽

Price Discovery ◽

Macroeconomic Announcements ◽

Fx Market

Download Full-text

Evidences for Price Discovery between On- and Off-shore Won/Dollar Spot, Forward and NDF FX Rate

Journal of Derivatives and Quantitative Studies ◽

10.1108/jdqs-02-2016-b0006 ◽

2016 ◽

Vol 24 (2) ◽

pp. 339-363

Author(s):

Ki Beom Binh ◽

Sang-min Lee ◽

Won Seop Lee

Keyword(s):

Financial Markets ◽

Exchange Rates ◽

Price Discovery ◽

Mutual Influence ◽

Dollar Spot ◽

Information Share ◽

Global Crisis ◽

Exchange Rate Fluctuations ◽

Spot Exchange Rate ◽

Fx Market

Using Hasbrouck’s (1995, 2002) information share method, we examine the mutual price discovery dynamics among Won/Dollar spot, forward, and NDF exchange rates in on- and off-shore FX markets. Our findings include : (i) During the entire period, the mutual price discovery between on-shore FX market and off-shore NDF market are significantly led by on-shore Won-Dollar spot and forward exchange rates. (ii) Within the period around the global crisis, NDF exchange rates have mutual influence on the price discovery, which is expecially greater than the any other period. The results show Won-Dollar spot exchange rate fluctuations during the global crisis are greatly affected by external factors of the international financial markets. Not only that, but off-shore NDF trading promptly reflects the price information of KRW on the factors.

Download Full-text