This study models and explains the long-run dynamic equilibrium relationships between S&P CNX Nifty index and corresponding near month futures, next month futures and far month futures. These relationships have been formulated based on cost-of-carry model using the Johansen’s cointegrating framework. All the three stock index futures have been included simultaneously in the econometric model, along with the stock index spot price, which enables the model to capture the long-run equilibrium relationships more realistically as compared to pair-wise cointegration. Three cointegrating relationships have been identified between spot index and the three index futures and the relative importance of these relationships in the Vector Error Correction Model (VECM) has been compared based on their speed of adjustment back to the equilibrium.

Econometric modeling of the dynamic equilibrium relationships between stock index and stock index futures has been, and continues to be an interesting topic for researches in related areas. Many researchers have used the cointegration approach for modeling these relationships. A lot of work has been done in this area aiming different aspects of these relationships. Cointegration approach has been used to study the price discovery and lead-lag relationships between spot and futures markets (Ghosh, 1993; Wahab and Lashgari, 1993; Antoniou and Holmes, 1996; Pizzi et al. 1998; Brooks et al. 2001; Lafuente, 2002; Lin et al. 2002; Tan, 2002; Ramasamy and Shanmugam, 2004; Zhong et al. 2004). These lead-lag relationships have further been used for forecasting returns (Brooks et al. 2001) and for deriving trading strategies (Brooks et al. 2001).

Cointegration approach has been used to study the market efficiency (Antoniou and Holmes, 1996) and also to study the level of index arbitrage and convergence of cash and futures prices (Wang and Yau, 1994). Cointegration approach has also been used to study the causality between stock index and index futures (Ghosh, 1993; Nieto et al. 1998; Sim and Zurbruegg, 2001; Lin et al. 2002; Tan, 2002). When coupled with GARCH and related techniques, cointegration approach can be used to study the interactions between returns and volatility of the index spot and futures markets (Lin et al. 2002; Lafuente, 2002).

Applied Finance Journal, Study Models, Vector Error Correction Model, Trading Strategies, Econometric Model, National
Stock Exchange, NSE, Benchmarking, Stock Index Futures, Statistical Techniques, Regression Analysis, Time Series, Financial System, Brenner and Kroner, Cointegration Model.