An Empirical Study on the Volatility Impact of Equity Derivatives on Underlying Spot Market

The study examines the impact of equity derivative trading on the volatility of spot market in India. Monthly time series data for the period from January 1, 1996 to December 31, 2016 is used. The results from the Hausman test and structural break test provide support that there is a significant influence of the introduction of stock futures and stock option on the stock market volatility. High volatility of prices is considered as a major risk in derivative trading, but this situation benefits the investors. As the regulatory process continues, policymakers must seek to ensure that the derivatives market is a venue to manage risk, rather than a source of risk itself. Thus, the investor should be aware and understand that the derivatives are not risky, but it is the responsibility of the investors to ensure that the risks are effectively controlled and limited to the levels that do not pose any threat to their investment position, and consider it as a hedging tool instead of speculative tool