The Causal Relationship Between Exchange Market Volatility And The Futures Market

Abstract

Futures contracts are widely considered by investors in their decision to manage risk beter by hedgeing against risks that arise as a result of fluctuations in financial markets. The aim of this study is to investigate the causality relationship between exchange market volatility and the futures market. To model the exchange market volatility, two symmetric (ARCH and GARCH) models and one asymmetric (EGARCH) model were used as the conditionally variance models. EGARH (1,1) was selected as the most suitable model to represend the exchange market volatility in the study where the dollar selling price and the dollar futures contract settlement price are used as in put data. The selection of the EGARCH model shows that the volatility in exchange markets is asymmetric to positive and negative shocks. Granger causality test was applied to see whether there was a causal relationship between exchange market volatility and the futures market in the study. According to the findings of the study, there is a bidirectional causality relation between the foreign exchange market volatility and the futures market. This result suggests that the futures market and the exchange market in Turkey are complementary markets, and that the flow of information between the two markets is rapidly taking place.