In India, derivatives were launched mainly with the twin objective of risk transfer and increasing liquidity in order to ensure better market efficiency. Therefore, it is important, from theoretical and practical points of view, to examine how far these objectives have been materialized. This paper attempts to study the volatility implications of the introduction of futures for the stock market in India. The data set covers spot market returns of nine individual stocks which have been available for trade in the futures segment of the NSE from November 9, 2001 when stock futures were introduced. The period analyzed is from October 1995 through June 2006. To account for the non-constant error variance in the return series, the study applies GARCH model for incorporating futures dummy variable in the conditional variance equation. The study finds persistence and clustering of volatility in general and little or no impact of the futures trading on the market volatility in majority of the cases. But the volatility is found mean reverting in all the stocks examined. Of the nine, seven stocks were found affected by domestic market returns and three stocks by global market returns.

The modeling of asset returns volatility continues to be one of the key areas of present financial research as it provides major information on the risk pattern involved in the investment and transaction process. A number of works have been undertaken in this area. Given the fact that stock markets normally exhibit high level of price volatility leading to unpredictable outcomes, it is important to examine the dynamics of volatility. With the introduction of derivatives in the equity markets in the late 1990s in the major world markets, the volatility behavior of the market has further got complicated as the derivatives opens new avenues for hedging and speculation.

The derivatives were launched mainly with the twin objective of risk transfer and to increase liquidity thereby ensuring better market efficiency. To examine how far these objectives have been materialized is important from theoretical and practical points of view. In India, trading in derivatives started in June 2000 with the launch of futures contracts in BSE Sensex and S&P CNX Nifty Index on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) respectively. Options trading commenced in June 2001 in the Indian market. Derivatives trading on individual stocks began in November 2001. Since then the Futures and Options (F&O) segment has been continuously growing in terms of new products and contracts, volume, and value. At present, the NSE has established itself as the market leader in this segment in the country with more than 99.5% market share (NSE Fact Book, 2006, p. 85).

Applied Finance Journal, Impact of Stock Future, Stock Market Volatility, Indian Stock Market, National Stock Exchnge, NSE, Bombay Stock Exchange, BSE, Derivatives Trading Market, Risk Management, Financial Time Series, Spot market, Infosys, Ambuja, Regression Analysis, Financial Management, Behavior of Stock Market Prices, Business Finance.