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

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  • P. Srinivasan

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.

Suggested Citation

  • P. Srinivasan, 2010. "Do futures and options trading increase spot market volatility in India? The case of S&P CNX Nifty," International Journal of Business Performance and Supply Chain Modelling, Inderscience Enterprises Ltd, vol. 2(2), pages 134-145.
    • Handle: RePEc:ids:ijbpsc:v:2:y:2010:i:2:p:134-145
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    Cited by:

    1. Wurm, Laura, 2021. "Strangling speculation: The effect of the 1903 Viennese futures trading ban," QUCEH Working Paper Series 21-09, Queen's University Belfast, Queen's University Centre for Economic History.

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