Relative Volatility in Spot and Futures Market in Selected Indices of NSE in India-An Analysis

Abstract

This study attempts to investigate the change, if any, in the volatility observed in the Indian stock market due to the introduction of futures trading. The change in the volatility is compared in terms of the structure of the volatility. This is done to give insights into the way the futures market is influencing the Indian spot market’s volatility. The main objective of the study is to investigate whether there has been significant change in relative volatility of the underlying spot return and futures return. The period of study is from 1st January 1997 to 31st May 2007 for the spot prices. The study used three stock indices of NSE namely Nifty, CNX IT and CNX Bank. The index futures time series analyzed here uses data on the near month contract as they are most heavily traded. The study has used four measures of volatility. The study reveals that for the three NSE indices, the study rejects the null hypothesis of ‘no significant change in relative inter-day volatility between spot prices and futures prices’ over the entire period 2000-2007, but cannot reject the hypothesis fully for all the individual years. There is significant change in relative intra-day volatility between spot prices and futures prices for all the three NSE indices.