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Efficiency of Indian Equity Futures Market—An Empirical Analysis with reference to National Stock Exchange

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  • Partha Sarathi Roy
  • Tanupa Chakraborty

Abstract

At National Stock Exchange (NSE), the largest by market capitalization and the most liquid stocks, which form the majority of free float market capitalization of the exchange, have traded futures contracts. The equity stock futures segment in India has recorded very high growth in trading volume and turnover for more than one decade where majority trade happens on NSE. The primary objective of this study is to investigate the dynamic linkages between equity stock futures and their underlying spot markets. The article examines market efficiency and the causal relationship between single-stock futures and underlying stocks traded at NSE, by employing Johansen cointegration test, a test for autoregressive (AR) order of basis, vector error correction model (VECM) and impulse response functions. The result shows the existence of long-run equilibrium relationship between equity stock futures and their underlying stocks. The spot market is found to play a lead role in correction of any short-run disequilibrium towards long-run equilibrium, for the majority of stocks. Both spot and future markets contribute in price discovery and neither of the markets display considerably higher information efficiency compared to the other. In contrast, the study also reveals possibilities of arbitrage opportunity between the equity stock futures market and the underlying spot market in absence of transaction costs possibly due to faster correction of short-run disequilibrium by spot prices.

Suggested Citation

  • Partha Sarathi Roy & Tanupa Chakraborty, 2023. "Efficiency of Indian Equity Futures Market—An Empirical Analysis with reference to National Stock Exchange," Global Business Review, International Management Institute, vol. 24(6), pages 1326-1352, December.
    • Handle: RePEc:sae:globus:v:24:y:2023:i:6:p:1326-1352
    DOI: 10.1177/0972150920920462
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    References listed on IDEAS

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