A study on stock index and stock index futures with special reference to S and P CNX NIFTY and NIFTY futures

Abstract

The relationship between stock index and stock index futures contracts in an emerging economy like India is an area that needs special attention. This topic has been addressed by a number of financial economists from the front of efficiency, volatility and causal relationship including Danthine (1978), French (1986), Stoll and Whaley (1990), Brorsen (1991), Chan et al (1991), Mukharjee, Kedarnath and Mishra (2000), Gulen and Mayhew (2000), Bandivadekar and Ghosh (2003), Sah and Omkarnath (2005), Gupta and Singh (2006), Floros and Vougas (2008), Debasish (2011). Most of them are of the view that, index futures have a strong relationship with the underlying index, thereby improving the efficiency, reducing the volatility and acts as a price discovery vehicle. The review of literature has resulted in certain gaps that motivated us in carrying out further research on this topic. First, the literature lacks comprehensive research on the index futures growth in isolation after its inception. Second, there is fragmented result on, which market incorporates the new information faster and contributing more to the price discovery process. Third, introduction of index futures have stabilizing or destabilizing effect by changing volatility is highly concentrated in large capitalized markets and the significance of index futures in terms of volatility is a subject need to be analysed empirically with respect to India. Fourth, the need arises to analyse the co-movements and causality between stock index and its futures resulting into lead lag relationship. Therefore, the study of stock index and stock index futures in India with special reference to Nifty Index and its future is a discussion matter should be resolved empirically. Research Objective To study India s stock index futures market during 2000-2011. To test empirically the efficiency of Indian spot and index futures market. To examine the time varying properties of Indian spot and index futures market volatility.