Do futures and options trading increase spot market volatility in India? The case of S&P CNX Nifty

P. Srinivasan

International Journal of Business Performance and Supply Chain Modelling, 2010, vol. 2, issue 2, 134-145

Abstract: The exponential generalised autoregressive conditional heteroscedasticity (EGARCH) model followed by standard GARCH (1, 1) model were employed to investigate the impact of introduction of futures and options trading on the volatility of the underlying spot market in India. The empirical analysis was conducted for the daily closing price returns of S&P CNX Nifty spot index from 1st January, 1996 through 31st October, 2008. The empirical results reveal that the spot market volatility has been declined after the introduction of futures and options trading in India. Besides, the empirical results indicate that the impact of recent news has a greater impact on the spot market changes following the onset of futures/options trading. At the same time, the persistence of volatility shocks has been declined in the post-derivatives scenario indicating increased efficiency of the Indian spot market. Hence, the present study suggests that the introduction of futures and options trading have improved the speed and quality of information flowing in the spot market. This enhances the overall market depth, increases market liquidity and ultimately reduces informational asymmetries and therefore compresses spot market volatility in India.

Keywords: futures trading; options trading; GARCH; market depth; market liquidity; symmetric effects; asymmetric effects; volatility; India; spot markets; S&P CNX Nifty; stock markets; stock exchanges; stock indices; Standard & Poor's; exponential generalised autoregressive conditional heteroscedasticity; EGARCH; closing price returns; news impact; information flows; informational asymmetries; business performance; operations research. (search for similar items in EconPapers)
Date: 2010
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