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Stock Futures Introduction & Its Impact on Indian Spot Market

Author

Listed:
  • Bhattacharyya, Surajit
  • Saxena, Arunima

Abstract

Futures have been recently introduced to cater the needs of investors and fill up the existing gaps in stock market. Studies show that, in the long-run, futures introduction does not have any effect on the spot market; however, in the short-run volatility in the spot market increases; Paudyal et al. (2005). Harris (1989) finds that increased volatility in the spot market is not solely due to the futures introduction. Alexakis (2007) substantiates the stability of indices after futures introduction. This study is set about to understand the impact of stock futures introduction on the Indian spot market. This study makes an initial attempt to capture the same by considering a small sample of 20 scrips, segregated as small and large caps, listed on NSE for the period August 2005 to May 2008. Using Hoadley Options, volatility modeled by GARCH (1, 1) is estimated. Considering both volume and volatility, mixed evidences are witnessed. Futures introduction has some stabilizing effect on large caps. For small caps, increase in volatility is accompanied by increase in volume, thereby, improving the liquidity of the scrips.

Suggested Citation

  • Bhattacharyya, Surajit & Saxena, Arunima, 2008. "Stock Futures Introduction & Its Impact on Indian Spot Market," MPRA Paper 15250, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:15250
    as

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    References listed on IDEAS

    as
    1. Asger Lunde & Peter R. Hansen, 2005. "A forecast comparison of volatility models: does anything beat a GARCH(1,1)?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(7), pages 873-889.
    2. Frankie Chau & Phil Holmes & Krishna Paudyal, 2008. "The Impact of Universal Stock Futures on Feedback Trading and Volatility Dynamics," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(1‐2), pages 227-249, January.
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    4. Sumon Bhaumik & Suchismita Bose, 2007. "Impact of Derivatives Trading on Emerging Capital Markets: A Note on Expiration Day Effects in India," William Davidson Institute Working Papers Series wp863, William Davidson Institute at the University of Michigan.
    5. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," The Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 123-152.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Stock futures; Spot market; Stock price; Volatility; GARCH.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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