Impact of Futures and Options Trading on the Underlying Spot Market Volatility in India Cover Image

Impact of Futures and Options Trading on the Underlying Spot Market Volatility in India
Impact of Futures and Options Trading on the Underlying Spot Market Volatility in India

Author(s): Malabika Deo, G. Saravanan
Subject(s): Economy
Published by: S.E.I.F at Paris
Keywords: Derivatives; Index Futures; Index Options and Volatility.

Summary/Abstract: Indian capital market saw the launching of index futures and options on NSE on June 12, 2000 and June 4, 2001 respectively. This launching of derivatives in Indian stock markets was perceived to increase volatility in the stock market by some researchers, at the same time some other researchers anticipated decline in volatility. This paper tries to study whether the Indian stock markets show some significant change in the volatility after the introduction of derivatives trading. The study has been undertaken with a comprehensive daily data set from January 1, 1996 to March 31, 2007. To measure the volatility GARCH (1, 1) model has been used. The results show that the presence of derivatives markets on S&P CNX Nifty have declined the volatility marginally, and less reduction of volatility in spot market seems that presence of uninformed traders’ activities in derivatives market. Marginal volatility reduction in spot market is associated with the increase in market efficiency and improved market depth in post derivatives period. This identification rejects “destabilizing forces hypothesis and supports “market completion” hypothesis on derivatives.

  • Issue Year: 2010
  • Issue No: 1
  • Page Range: 213-228
  • Page Count: 16
  • Language: English