Effect of futures trading on spot‐price volatility: evidence for NSE Nifty using GARCH

Sathya Swaroop Debasish

Journal of Risk Finance, 2009, vol. 10, issue 1, 67-77

Abstract: Purpose - The paper aims to study the impact of the introduction of Nifty index futures on the volatility of the Indian spot markets by use of econometric models. Design/methodology/approach - The study considered six measures of volatility, the dynamic linear regression model, and the GARCH models to investigate volatility in National Stock Exchange (NSE) Nifty prices both before and after the onset of futures trading. Findings - The GARCH analysis confirmed no structural change after the introduction of futures trading on Nifty, and found that whilst the pre‐futures sample was integrated, the post‐futures sample was stationary. Spot returns volatility is found to be less important in explaining spot returns after the advent of futures trading in NSE Nifty. Practical implications - The results imply that futures markets serve their prescribed role of improving pricing efficiency and improve the quality of information flowing to spot markets. This will enable investors to prudently structure their strategies investing in both spot and futures markets. Originality/value - This study is an original piece of work towards exploring the impact of the introduction of futures trading on cash market volatility in an emerging economy like India.

Keywords: Future markets; Stock markets; Stock prices; India (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jrfpps:15265940910924508

DOI: 10.1108/15265940910924508

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