The exchange traded index futures were launched in India in June 2000. Subsequently, other derivative products like the index options, stock options, stock futures, were launched. Derivative products are turning more and more popular day by day. Nifty futures are scaling new heights and breaking records daily, in terms of volumes. The impact that the derivatives market has on the underlying spot market remains an issue debated again and again, with arguments both in favor and against them. This study aims to study the impact of the introduction of stock index futures on the volatility of the Indian spot markets.
The issues addressed in this paper are: Firstly, does the introduction of stock index futures reduce stock market volatility? Secondly, if there is a reduction in the volatility of the stock market post futures, are there no other reasons that could have caused such a reduction? And thirdly, if the futures effect is confirmed, is the effect immediate or delayed? The amended GARCH model is used to study the above objectives. The results obtained show that the results remain consistent with the studies for other emerging markets, like Malaysia and Italy. That is, the introduction of futures results in a reduction in stock market volatility. Also, apart from the introduction of stock index options in June 2001, there are no other factors that had caused this reduction. However, we found that the futures effect is delayed on NSE. |
