This paper intends to study and highlight the change in behavior of volatility of Indian stock market on the introduction of derivatives as a financial instrument, the announcement of union budget every year and the Lok Sabha (lower house of the Indian parliament) elections conducted during 1994-2012. Applying cointegration test between the S&P CNX Nifty and the FUTIDX index, it has been noticed that spot and futures markets are cointegrated with each other. Applying a dummy variable, TGARCH model, this paper aims to examine the impact of the above factors on the volatility of Nifty during the year 1994-2012.

Perhaps, the most successful and innovative financial instrument in the financial world has been the derivatives contracts. Having been introduced in Chicago, USA in the year 1982, it has spread all over the world like a blaze. Soon after its introduction in the 1980s, derivatives contracts took the major financial centers world over by storm, e.g., Australian stock market started trading futures contract in 1983, London started in the year 1984, the Hong Kong stock market started in 1986 and many more. Although it was not as early as the developed nations did, India finally launched the futures contracts in June 2000. Post-liberalization, in the early 1990s, Indian stock market and the economy as a whole showed immense potential as becoming a financial powerhouse. Considering the exponential growth of the Indian stock markets, Indian stock market watchdog Securities and Exchange Board of India (SEBI) decided to introduce the futures contracts in the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Integrating the Indian financial markets with the other developed financial markets and improvising market efficiency were the major objectives behind the introduction of derivatives in the Indian financial market. This was possible due to the recommendation provided by the L C Gupta Committee. The investors in capital markets have the independence of bearing a certain amount of risk beyond which the risk can be hedged away only in case of derivatives, and so it was absolutely imperative to introduce futures and options contracts in the Indian financial markets. The efficiency of a stock market is complemented by the efficiency of the derivatives market of the same country.

Applied Finance Journal, Determinants, Behavior,, Volatility, Indian Stock Market , Respect, Securities and Exchange Board of India (SEBI), Bombay Stock Exchange (BSE), National Stock Exchange (NSE), Ecopolitical Factors.