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The Impact of Derivatives on Stock Market Volatility: A Study of the Nifty Index

Author

Listed:
  • T. Mallikarjunappa

    (Department of Business Administration, Mangalore University, Mangalagangotri – 574199, Mangalore, DK, Karnataka, India)

  • Afsal E. M

    (School of Management and Business Studies, Mahatma Gandhi University, P.D. Hills, Kottayam – 686560, Kerala State, India)

Abstract

This paper studies the volatility implications of the introduction of derivatives on stock market volatility in India using the S&P CNX Nifty Index as a benchmark. To account for non-constant error variance in the return series, a GARCH model is fitted by incorporating futures and options dummy variables in the conditional variance equation. We find clustering and persistence of volatility before and after derivatives, while listing seems to have no stabilisation or destabilisation effects on market volatility. The post-derivatives period shows that the sensitivity of the index returns to market returns and any day-of-the-week effects have disappeared. That is, the nature of the volatility patterns has altered during the post-derivatives period.

Suggested Citation

  • T. Mallikarjunappa & Afsal E. M, 2008. "The Impact of Derivatives on Stock Market Volatility: A Study of the Nifty Index," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 4(2), pages 42-66.
    • Handle: RePEc:usm:journl:aamjaf00402_42-66
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    Cited by:

    1. Parizad Phiroze Dungore & Sarosh Hosi Patel, 2021. "Analysis of Volatility Volume and Open Interest for Nifty Index Futures Using GARCH Analysis and VAR Model," IJFS, MDPI, vol. 9(1), pages 1-11, January.
    2. Rasekhi , Saeed & Nabavi , Nasim, 2019. "The Effect of Derivative Instruments on the Contagion of Stock Markets in Developing Countries," Journal of Money and Economy, Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 14(4), pages 475-494, October.
    3. Rajesh Pathak & Kaushik Bhattacharjee & Nagi Reddy V., 2015. "Information Content of Derivatives under Varying Market Conditions and Moneyness: The Case of S&P CNX Nifty Index Options," Global Business Review, International Management Institute, vol. 16(2), pages 281-302, April.

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