Abstract
The USD-INR currency pair has often been in the news for its excess volatility. This study examines the veracity of this belief by using the extreme value estimator proposed by Rogers and Satchell (Ann Appl Prob 1(4):504–512, 1991) and the VRatio proposed by Maheswaran et al. (J Emerg Mark Finance 10(2):175–196, 2011). The volatility in the USD-INR exchange rate is determined for the period beginning January 2009 and ending June 2015. The volatility of the GBP-INR and EUR-INR currency pairs is also determined for making comparisons. The results show that the EUR-INR and the GBP-INR currency pairs exhibit excess volatility, but not the USD-INR. This result runs counter to the commonly held view. This study also examines the volatility of the three currency pairs using the multiple-days’ time windows for better approximation of Brownian motion while embedding the jumps in the daily opening prices. There is no evidence to support the existence of excess volatility in the USD-INR.
Similar content being viewed by others
Notes
Currency composition of official foreign exchange reserves (COFER) data released by International Monetary Fund (IMF) shows that US dollars, Euros and Pound sterling are the most reserved foreign exchange currency by IMF member, non-member countries/economies and other entities. This is because most of the world trade transactions involve these three currencies.
References
Alizadeh, S., M.W. Brandt, and F.X. Diebold. 2002. Range-based estimation of stochastic volatility models. The Journal of Finance 57(3): 1047–1091.
Amin, K.I., and R.A. Jarrow. 1991. Pricing foreign currency options under stochastic interest rates. Journal of International Money and Finance 10(3): 310–329.
Aziz, J., I. Patnaik, and A. Shah. 2008. The current liquidity crunch in India: Diagnosis and policy response. Unpublished manuscript, National Institute of Public Finance and Policy.
Ball, C.A., and W.N. Torous. 1984. The maximum likelihood estimation of security price volatility: Theory, evidence, and application to option pricing. The Journal of Business 57: 97–112.
Bansal, R., M. Chereddy, M. Kairavi, and S. Hendry. 2013. INR to USD Currency Exchange Rate What factors significantly affect the INR to USD currency exchange rate?. http://faculty.babson.edu/goldstein/Teaching/FIN3560Fall2013/Projects/Indian%20FX%20.pdf. Accessed 8 August 2016 (2013, December).
Biger, N., and J. Hull. 1983. The valuation of currency options. Financial Management 12: 24–28.
Cuthbertson, K., and S. Hyde. 2002. Excess volatility and efficiency in French and German stock markets. Economic Modelling 19: 399–418.
De Bondt, Werner F.M., and Richard H. Thaler. 1985. Does the stock market overreact? Journal of Finance 40: 793–805.
De Long, J.B., and R. Grossman. 1992. Excess volatility on the London stock market, 1870–1990. J. Bradford De Long’s working paper no. 133. Berkeley: University of California.
Fama, Eugene F. 1970. Efficient Capital Markets: A Review of Theory and Empirical Work. Journal of Finance 25: 383–417.
Garman, M.B., and M.J. Klass. 1980. On the estimation of security price volatilities from historical data. Journal of Business 53: 67–78.
Gill, S. 1999. The Geopolitics of the Asian Crisis. Monthly Review 50: 1–9.
Heaney, R. 2004. Excess volatility? The Australian stock market from 1883–1999. Managerial Finance 30(1): 76–94.
Horst, E.T., A. Rodriguez, H. Gzyl, and G. Molina. 2012. Stochastic volatility models including open, close, high and low prices. Quantitative Finance 12: 199–212.
Kleidon, A.W. 1986. Variance bounds tests and stock price valuation models. The Journal of Political Economy 94: 953–1001.
Knight, F.B. 1962. On the random walk and Brownian motion. Transactions of the American Mathematical Society 103(2): 218–228.
Kunitomo, N. 1992. Improving the Parkinson method of estimating security price volatilities. Journal of Business 65(2): 295–302.
LeRoy, S.F., and R.D. Porter. 1981. The present value relation: Tests based on implied variance bounds. Econometrica 49(3): 555–574.
Magdon-Ismail, M., and A.F. Atiya. 2003. A maximum likelihood approach to volatility estimation for a Brownian motion using high, low and close price data. Quantitative Finance 3: 376–384.
Maheswaran, S., G. Balasubramanian, and C.A. Yoonus. 2011. Post-colonial finance. Journal of Emerging Market Finance 10(2): 175–196.
Maheswaran, S., and D. Kumar. 2013. An automatic bias correction procedure for volatility estimation using extreme values of asset prices. Economic Modelling 33: 701–712.
Nagaraju, G. 2009. A measure of exchange rate volatility: Scenario analysis of the effect of RBI’s intervention in the Indian FOREX market. IGIDR Proceedings/Project Reports Series.
Parkinson, M. 1980. The extreme value method for estimating the variance of the rate of return. Journal of Business 53: 61–65.
Patnaik, I., and A. Shah. 2010. Does the currency regime shape unhedged currency exposure? Journal of International Money and Finance 29(5): 760–769.
Prakash, A. 2012. Major episodes of volatility in the Indian foreign exchange market in the last two decades (1993–2013): Central Bank’s Response. RBI Occasional Papers 33:1–2.
Rogers, L.C.G., and S.E. Satchell. 1991. Estimating variance from high, low and closing prices. Annals of Applied Probability 1(4): 504–512.
Shiller, R.J. 1979. The volatility of long-term interest rates and expectations models of the term structure. Journal of Political Economy 87: 1190–1219.
Shiller, R.J. 1981. Do stock prices move too much to be justified by subsequent changes in dividends? The American Economic Review 71(3): 421–436.
Yang, D., and Q. Zhang. 2000. Drift-Independent Volatility Estimation Based on High, Low, Open, and Close Prices. The Journal of Business 73(3): 477–492.
Author information
Authors and Affiliations
Corresponding author
Additional information
This research was not funded by any individual or institute.
Rights and permissions
About this article
Cite this article
Kayal, P., Maheswaran, S. Is USD-INR Really an Excessively Volatile Currency Pair?. J. Quant. Econ. 15, 329–342 (2017). https://doi.org/10.1007/s40953-016-0054-3
Published:
Issue Date:
DOI: https://doi.org/10.1007/s40953-016-0054-3