 Derived signals for S & P CNX nifty index futuresB. Prasanna Kumar ()
Financial Innovation, 2017, vol. 3, issue 1, 1-22 Abstract: Abstract Background The financial futures market in India is relatively new. The major advantage of derivatives as financial products is that their use minimizes the risks associated with securities. However, hedging effectiveness requires understanding key market signals such as trading margins, credit availability, and price discreteness. Methods This study considers the Standard & Poor’s CNX Nifty 50 Index futures for data analysis with the application of V-IGARCH (1, 1) two-stage model. The purpose for V-IGARCH (1, 1) is used to observe the positive effects of credit availability on the variance of futures returns. The first stage V-IGARCH (1, 1) endogenous mean and conditional variance returns are measured with exogenous factors from the second stage V-IGARCH (1, 1) models. The second stage V-IGARCH (1, 1) models specify the market participants’ exogenous conditional probabilistic values for returns. Results In the first stage, it was observed that returns and trading margins, as well as credit availability, were cointegrated, thereby indicating a long-term relationship between them. In the first stage of the V-IGARCH (1, 1) model, heteroscedasticity with the mean returns through residuals was observed, where the estimated coefficients were negative. This finding indicated that maximizing returns requires efficient use of trading margins as well as availability of credit positions. From the second stage regression estimation, it was observed that trading prices and total money supply were directly related, and thus had direct effects on returns. The total money supply increased gradually until the last trading hour. In the conditional variance equation, total money supply was related negatively to the availability of credit for market participants. Under these circumstances, the efficient interbank call interest rate was necessary to maintain the trading margin. In effect, efficient Nifty returns would be achieved. Conclusions This study found that trading margins, credit availability, and price discreteness affect the variance of returns in the Indian futures markets. The study also found that market participation was inadequate as a result of endogenous and exogenous conditional probabilistic reasons. Efficient trading margins and effective credit availability positions were not realized. Price discreteness had a negative impact on returns, as trading prices and credit availability in each of the trading hours were inversely related. Trading risks, and hence losses, were not minimized by hedging positions. The monopoly power in the Nifty market was 8.9526. Given this monopoly power, returns were less elastic with respect to the existing trading margins, financial resources, and market microstructure (price discreteness) that were available for reinvestment. Therefore, before investing in derivatives (index futures), market investors should evaluate trading margins, credit availability positions, and price discreteness. Through these signals, investors will be able to gain essential market knowledge and participate accordingly in trading for efficient returns. Keywords: Signals; Credit; Margin; Discreteness; Nifty; Returns (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spr:fininn:v:3:y:2017:i:1:d:10.1186_s40854-017-0067-8 Ordering information: This journal article can be ordered from DOI: 10.1186/s40854-017-0067-8 Access Statistics for this article Financial Innovation is currently edited by J. Leon Zhao and Zongyi More articles in Financial Innovation from Springer, Southwestern University of Finance and Economics |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.