Futures Trading and Spot Market Volatility

Derivative is the greatest financial innovations made in the history of finance.In India, Derivatives instruments such as Index futures, stock futures, stock options were introduced from 2000 onwards.The Bombay Stock Exchange lunched derivatives trading in the form of Index futures on June 9, 2000, followed by Index futures contracts on the S&P CNX Nifty Index of National Stock Exchange on June 12, 2000. After futures trading is introduced, the economic literature has intensified the debate over the impact of futures trading on the underlying spot index volatility. The impact of futures trading on the spot price volatility is a research topic around the world. It is intended to study the impact of index futures trading on the underlying spot index volatility. The study employs both standard deviations as well as advanced econometric models such as ARCH/GARCH. The results report that, the introduction of futures trading has resulted in decline in the spot market volatility, due to the futures trading, as the methodology employed has effectively isolated the volatility caused by futures trading from the volatility arising due to market wide factors.