Study on the Impact of Future and Options on Spot Market Volatility : A Case of S and PCNX Nifty Index

Futures trading in India commenced in June 2000 with the introduction of stock index futures by the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). An important reason for the introduction of futures in India was the high trading volatility of the Indian stock market. This paper seeks to provide evidence on the impact of futures and options on spot market volatility. The sample data consist of daily opening and closing price returns of S & P CNX Nifty, Nifty Junior and S & P 500 Index from January 1, 1997 to March 31, 2005. This paper uses OLS and family of GARCH techniques to capture the time-varying nature of volatility and volatility clustering phenomenon in the data. The results suggest that there are no significant changes in the volatility of the spot market of the S & P CNX Nifty Index, but the structure of the volatility has changed to some extent. It has also found that the new information is assimilated into prices more rapidly than before, and there is a decline in the persistence of volatility since the inception of futures trading.