Price Discovery Process in Nifty Spot and Futures Markets

Kapil Choudhary and Sushil Bajaj
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Kapil Choudhary: Kapil Choudhary is Assistant Professor at the Department of Commerce, Chaudhary Devi Lal University, Sirsa, Haryana, India. E-mail: kapilcdlu@gmail.com

Global Business Review, 2013, vol. 14, issue 1, 55-88

Abstract: This article investigates the role of price discovery in the Indian stock market by taking into consideration 41 individual securities and Nifty. The present article reports a study based on the daily adjusted closing price of spot and futures for the time period between June 2000 and August 2010 (index) and from November 2001 to August 2010 (individual stocks). To analyze the price discovery role, Engle and Granger’s Residual Based approach, Johansen’s cointegration test and VECM (Vector Error Correction Model) are used. The results depict that futures price series leads the spot price series in case of Nifty and 21 stocks, and 20 stocks’ future price series is led by spot price series. As far as causality is concerned, 14 stocks show feedback causality, 21 stocks including Nifty show unilateral causality and 7 stocks show absence of causality. This study also finds that both the markets, i.e., futures and spot, play an important price-discovery role, implying that futures (spot) prices may contain useful information about spot (futures) prices.

Keywords: Cointegration; causality; price discovery (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:sae:globus:v:14:y:2013:i:1:p:55-88

DOI: 10.1177/0972150912466444

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