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Information Memory and Pricing Efficiency of Futures Contracts

Author

Listed:
  • Kapil Gupta

    (Kapil Gupta, ICFAI Business School (IBS-G), Gurgaon, Haryana, India, kapilfutures@gmail.com.)

  • Balwinder Singh

    (Balwinder Singh, Department of Commerce and Business Management, Guru Nanak Dev University, Amritsar, India, bksaini@gmail.com.)

Abstract

The present study investigates the information dissemination efficiency of the Indian equity futures market. Daily log returns of all indices as well as individual stock futures contracts understudy have been found to be non-normal and responding asymmetrically to the information shocks. Volatility clustering in daily log returns of all indices and individual stock futures contracts has been identified, which suggests that Indian equity futures market is not an efficient price-discovery vehicle. In addition, the present study finds an evidence of leverage effect, which implies that traders assign more weightage to bad news, whereas, they cautiously react to positive news. Mean reversion in daily log returns of the Indian equity futures market further suggests that traders (especially retail traders) need to be overcautious while adding equity futures as leverage products in their portfolio because in a highly volatile market, framing a trading rule to earn super normal profit may be an easy task for big/institutional traders but may not be possible for small/uninformed traders.

Suggested Citation

  • Kapil Gupta & Balwinder Singh, 2009. "Information Memory and Pricing Efficiency of Futures Contracts," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(2), pages 191-250, May.
    • Handle: RePEc:sae:emffin:v:8:y:2009:i:2:p:191-250
    DOI: 10.1177/097265270900800205
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    More about this item

    Keywords

    Price discovery; cost-of-carry; efficient market hypothesis; information asymmetry; conditional; heteroscedasticity; JEL Classification: D81; JEL Classification: D82; JEL Classification: G12; JEL Classification: G14; JEL Classification: N25;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • N25 - Economic History - - Financial Markets and Institutions - - - Asia including Middle East

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