Stock Futures Introduction & Its Impact on Indian Spot Market

Futures have been recently introduced to cater the needs of investors and fill up the existing gaps in stock market. Studies show that, in the long-run, futures introduction does not have any effect on the spot market; however, in the short-run volatility in the spot market increases; Paudyal et al. (2005). Harris (1989) finds that increased volatility in the spot market is not solely due to the futures introduction. Alexakis (2007) substantiates the stability of indices after futures introduction. This study is set about to understand the impact of stock futures introduction on the Indian spot market. This study makes an initial attempt to capture the same by considering a small sample of 20 scrips, segregated as small and large caps, listed on NSE for the period August 2005 to May 2008. Using Hoadley Options, volatility modeled by GARCH (1, 1) is estimated. Considering both volume and volatility, mixed evidences are witnessed. Futures introduction has some stabilizing effect on large caps. For small caps, increase in volatility is accompanied by increase in volume, thereby, improving the liquidity of the scrips.