Are exchange rates interdependent? Evidence using wavelet analysis. Issue 33 (15th July 2017)

• Record Type: Journal Article
• Authors: Kumar, Satish; Pathak, Rajesh; Tiwari, Aviral Kumar; Yoon, Seong-Min
• Is Part Of: Applied economics. Volume 49:Issue 33(2017)
• Page Start: 3231
• Page End: 3245
• Publication Date: 2017-07-15
• Subjects: Currency futures -- wavelet cohesion -- multiple-wavelet correlation -- interdependency -- international portfolio diversification; F31 -- C10 -- C51 -- C58 -- G11; Economics -- Periodicals; 330
• DOI: 10.1080/00036846.2016.1257108
• Languages: English
• ISSNs: 0003-6846

Abstract

ABSTRACT: We examine the co-movement in daily returns of USD–INR, EUR–INR, GBP–INR, and JPY–INR currency pair futures contracts traded on the National Stock Exchange of India (NSE) using the wavelet cohesion approach. This study contributes to the literature by examining the scantly studied area of co-movement in exchange rates and using the wavelet approach, which allows us to analyse time–frequency-wise co-movement of the time series. The empirical results indicate that the currency futures markets are nearly perfectly integrated in the long run (monthly, quarterly and biannual scales) offering little potential gains from international portfolio diversification. The discrepancies between currency futures markets are small and almost fade away within 3–6 months. Moreover, international currency diversification might offer relatively higher potential gains at intraweek, weekly, and fortnightly time horizons owing to lower correlations among the currencies under consideration. Finally, our multiple-wavelet correlation and cross-correlation analysis shows that GBP acts as a potential leader/follower across scales. The results of our analysis indicate the dynamic pattern of co-movement among the major currency futures contracts, which provides several implications for portfolio managers and international investors participating in the Indian market.