Major Research Project on Causal Nexus between Settlement Prices, Trading Volume, Open Interest and Volatility on Indian Capital Market: Evidence from Stock Futures

Major Research Project on Causal Nexus between Settlement Prices, Trading Volume, Open Interest and Volatility on Indian Capital Market: Evidence from Stock Futures

Principal Investigator

Dr Jain Mathew

Professor,

Department of Management Studies

CHRIST (Deemed to be University), Bangalore

and

Co- Investigator

Dr K Srinivasan

Assistant Professor,

Department of Management Studies

CHRIST (Deemed to be University), Bangalore

 

Abstract:

 

Many associate the financial market mostly with the equity market. The financial market is, of course, far broader, encompassing bonds, foreign exchange, real estate, commodities, and numerous other asset classes and financial instruments. A segment of the market has fast become its most important one: derivatives. The derivatives market has seen the highest growth of all financial market segments in recent years. It has become a central contributor to the stability of the financial system and an important factor in the functioning of the real economy. Despite the importance of the derivatives market, few outsiders have a comprehensive perspective on its size, structure, role and segments and on how it works. The derivatives market has recently attracted more attention against the backdrop of the subprime lending crisis, financial crisis, fraud cases and the near failure of some market participants. Although the financial crisis has primarily been caused by structured credit-linked securities that are not derivatives, policy makers and regulators have started to think about strengthening regulation to increase transparency and safety both for derivatives and other financial instruments.

 

The study is purely based on the secondary data for examining futures market in terms of relationship and hedging or speculative motive behind the traders in stock futures contracts in India. The study period spanned from January 2008 to December 2012 with a sample of stock futures contracts of 7 companies in Automobile Sector, Banking Sector, Information Technology Sector and Pharmaceutical Sector in India. During the sample period, the futures securities traded from 9:55 A.M to 3:30 P.M. All the required information for the stock futures contracts are collected from National Stock exchange (NSE) and their contract specifications, trading details are retrieved from their website. Out of the three types of contracts that are usually traded in the futures markets — near month, middle month and far month futures contracts — near month futures contracts are considered for the purpose of analysis, since most trading activities take place in the near month contracts than on the other two types of contracts. The data are analyzed by using the econometric software package Eviews 7.2 by using Johansen Co-integration test, VECM, VAR, VDC, IRF, Simple Model, Market Model and AGARCH Model.

 

The findings from co-integration test or the relation of short-run and long-run stability between variables especially futures returns, trading volume, open interest and volatility is vital for policy makers. In the view of the feedback effect, the determination of futures market variables in the short-run and the linkage pattern of return are influenced by all the other variables, whereas the ECTs coefficients are negative and significant in the long-run but their values are too high to be in equilibrium. We conclude that, any deviation from the equilibrium Co-integrating relationships, as measured by the ECTs, is mainly caused by changes in returns and volatility i.e. unidirectional causality exists between trading volume and open interest variables. This study concludes that information based upon trading volume, open interest are not the key determining factors for futures price volatility, but the rate of information arrival proxies like trading volume, open interest and volatility are the important sources for measuring the fluctuations in future returns. Against this backdrop, this study examines whether the hedging or speculation is more prevalent in Indian futures markets by using LMSW model reasoning has been adopted to estimate the variation in the informational asymmetry in the cross-sectional time series data, so that such analysis could produce biased standard errors to control the factors using a market proxy. The results were observed with bi-directional relationship. But in case of ASHOKLEY the market behaved in rational way and indicated with Hedging effect. On the contrary, the stock futures like INFOSYSTCH and CIPLA are envisaged with Speculation effect, which is mainly since high volatility in the future markets attract the market participants to play a speculative role. Overall, it is clearly evidenced that major participants in physical markets use futures market for price discovery and price risk management.

 

Year of Publication: June 2014

ISBN:    978-93-82305-44-6

Major Research Project : Vol 5

Pages :    xii, 104

Price: available on request

Funded by Centre for Research-Projects-CHRIST (Deemed to be University)

Published by Centre for Publications, CHRIST (Deemed to be University)