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Mis-pricing in Single Stock Futures: Evidence from National Stock Exchange of India

Author

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  • Kiran Kumar Kotha

    (Indian Institute of Management Indore)

Abstract

We examine the determinants of mispricing in single stock futures traded in the National Stock Exchange of India, the second largest global trading venue for such contracts. We compute mispricing bounds using multi-regime models for over one hundred stocks. The size of the mispricing window - defined as the distance between these bounds - increases with decrease in liquidity. Liquidity of the futures market has a larger impact on the size of the mispricing window as compared to that of the spot market. After controlling for such liquidity effects, the size of the mispricing window is found to increase with increase in volatility. This suggests that concerns related to margin calls and execution shortfalls dominate early exit options. Volatility has an asymmetrical effect on mispricing bounds. We attribute this to short-sale constraints since they make the early exit option difficult to exercise when futures are under-priced.

Suggested Citation

  • Kiran Kumar Kotha, 2018. "Mis-pricing in Single Stock Futures: Evidence from National Stock Exchange of India," Proceedings of International Academic Conferences 7310288, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iacpro:7310288
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    File URL: https://iises.net/proceedings/43rd-international-academic-conference-lisbon/table-of-content/detail?cid=73&iid=023&rid=10288
    File Function: First version, 2018
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    More about this item

    Keywords

    Liquidity; Volatility; ShortSales;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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