Impact of Stock Futures on the Stock Market Volatility

In India, derivatives were launched mainly with the twin objective of risk transfer and increasing liquidity in order to ensure better market efficiency. Therefore, it is important, from theoretical and practical points of view, to examine how far these objectives have been materialized. This paper attempts to study the volatility implications of the introduction of futures for the stock market in India. The data set covers spot market returns of nine individual stocks which have been available for trade in the futures segment of the NSE from November 9, 2001 when stock futures were introduced. The period analyzed is from October 1995 through June 2006. To account for the non-constant error variance in the return series, the study applies GARCH model for incorporating futures dummy variable in the conditional variance equation. The study finds persistence and clustering of volatility in general and little or no impact of the futures trading on the market volatility in majority of the cases. But the volatility is found mean reverting in all the stocks examined. Of the nine, seven stocks were found affected by domestic market returns and three stocks by global market returns.