The Impact of Derivatives on Stock Market Volatility: A Study of the Nifty Index

T. Mallikarjunappa () and Afsal E. M
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T. Mallikarjunappa: Department of Business Administration, Mangalore University, Mangalagangotri – 574199, Mangalore, DK, Karnataka, India
Afsal E. M: School of Management and Business Studies, Mahatma Gandhi University, P.D. Hills, Kottayam – 686560, Kerala State, India

Asian Academy of Management Journal of Accounting and Finance (AAMJAF), 2008, vol. 4, issue 2, 42-66

Abstract: This paper studies the volatility implications of the introduction of derivatives on stock market volatility in India using the S&P CNX Nifty Index as a benchmark. To account for non-constant error variance in the return series, a GARCH model is fitted by incorporating futures and options dummy variables in the conditional variance equation. We find clustering and persistence of volatility before and after derivatives, while listing seems to have no stabilisation or destabilisation effects on market volatility. The post-derivatives period shows that the sensitivity of the index returns to market returns and any day-of-the-week effects have disappeared. That is, the nature of the volatility patterns has altered during the post-derivatives period.

Keywords: conditional volatility; heteroscedasticity; volatility clustering; market efficiency (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:usm:journl:aamjaf00402_42-66

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