A Study on the Price Discovery in Midcap Banking Spot and Futures Scrips in India Using VECM

The area of Financial Derivatives is a recent origin in India. The Derivative market in India was introduced in step by step manner. The players in the market use the derivative market for speculation and hedging their portfolio risk. The Financial leverage available in the futures market in margin requirements is more in the derivatives. So the players tend to take the leverage as their advantage for speculation. Due to Financial leverage the speculators use it as their financial advantage and also theoretically futures market captures the market information quickly and has to lead the market. The Objective of the paper is to examine the price discovery function of futures market then the spot market. The leverage function in Futures market and its return will lead the market partcipants to absorb the information faster than the spot market. A sample of 8 Banking stocks in midcap sector along with index such as Nifty and Bank Nifty have been selected to conduct the analysis. Johansen Cointegration and Vector Error correction models were used for the analysis. The Analysis was conducted on the daily data obtained from the NSE website since its inception to 31st December 2013. The study results confirm the existence of Price discovery function in Midcap stocks by Leading of Futures market but lags in few stocks