|
The
Relationship between Stock Market Variables and Option Market
Liquidity: Evidence from India
-- Sanjay
Sehgal and Vijayakumar N
Despite
being an organized stock market for over 100 years, the financial
derivatives market in India is in its nascent stage and therefore,
less explored. This paper attempts to examine the relationship
between the stock market characteristics and the option market
liquidity, using data for equity options and underlying stocks,
in the Indian context. It was found that while option liquidity
is positively related to stock price, stock liquidity and
stock return volatility, it is inversely related to uncertainty
in the information environment measured by the company size.
The results are robust to alternative measures of option liquidity
and different types of option. The findings are in conformity
with those of the developed markets, and shall be useful for
institutional investors, who actively trade in the options
market owing to its lower transaction cost, leverage advantage
and short sale restrictions on the underlying stocks.
©
2007 IUP . All Rights Reserved.
Influence
of Commodity Derivatives on Volatility of Underlying Asset
-- Gurpreet
Singh Sahi
This
paper studies the impact of introducing commodity futures
contracts on the volatility of the underlying commodity, in
the Indian context. Empirical methods, namely, GARCHX, Granger
causality, and forecast error variance decomposition are used
to examine the validity of one of the recurring arguments
made against futures markets, that they give rise to price
instability. Empirical evidence from GARCHX methods suggests
that in wheat, turmeric, sugar, cotton, raw jute and soybean
oil, the nature of spot price volatility has not changed with
the onset of futures trading. However, in wheat and raw jute,
there has been a weak destabilizing effect from futures to
the spot with the onset of futures trading. Granger causality
tests show that an unexpected increase in futures trading
volume unidirectionally causes an increase in cash price volatility
for wheat, turmeric, sugar, raw jute and soybean oil. Likewise,
there is a causal effect from unexpected increase in open
interest to cash price volatility for wheat, turmeric, raw
jute and soybean oil. These findings are in line with researches
done elsewhere that state that futures trading has a destabilizing
effect on agricultural commodities.
©
2007 IUP . All Rights Reserved.
Market
Efficiency of Indian Commodities Futures Exchange: A Case
of NCDEX
-- Anand
Literature
in finance and economics suggests that, futures price is the
best predictor of the spot price, that will prevail in future.
The unbiased nature of the market ensures that there is convergence
of futures and spot prices on the delivery day, so that there
does not exist any arbitrage opportunity. This phenomenon,
thus, not only helps the price discovery process but also
works as a price and factor distribution stabilization force,
over a period. But, as the literature survey suggests, the
commodity futures market in India was largely inefficient
before liberalization of the same in 2003. Therefore, the
question arises as to whether the situation has changed after
liberalization. Whether the markets have become more efficient
in terms of price forecasting, price discovery and unbiasedness.
The study of 12 commodities traded on NCDEX, for the contracts
ending in May 2006, using the different test methods showed
that only Gur and Gold have achieved market efficiency to
recognizable extent. Other commodities, if at all show some
relationship between futures and spot prices, then they are
doing so with a considerable lag; and in some cases, with
a bilateral causality or reverse causality. The study highlights
some fundamental reasons for inefficiency and provides suggestions
to overcome them.
©
2007 IUP . All Rights Reserved.
The
Credit Risk Transfer Market and Stability Implications for
UK Financial Institutions
--
Jorge A Chan-Lau and
Li Lian Ong
The
increasing ability to trade credit risk in financial markets
has facilitated its dispersion across financial and other
sectors. However, specific risks attached to Credit Risk Transfer
(CRT) instruments in a market with still-limited liquidity
means that its rapid expansion may actually pose problems
for financial sector stability, in the event of a major negative
shock to credit markets. This paper attempts to quantify the
exposure of major UK financial groups to credit derivatives,
by applying a Vector Autoregression (VAR) model to publicly
available market prices. The results indicate that use of
credit derivatives does not pose a substantial threat to financial
sector stability in the UK. Exposures across major financial
institutions appear sufficiently diversified to limit the
impact of any shock to the market, while major insurance companies
are largely exposed to the "safer" senior tranches.
©
2006 International Monetary Fund. Reprinted with permission.
|
