A Study on Empirical Analysis of Price Discovery and Causality between NSE Spot and Future Market in India

Abstract

The temporal relation between stock index and Index futures has been and continues to be of interest of regulators, academicians and practitioners alike for a number of reasons such as market efficiency volatility and arbitrage. In perfectly efficient markets profitable arbitrage should not exist as the price adjusts instantaneously and fully to new information.Considering the information exchange and price discovery rules of the future market, many theoretical as well as empirical attempts have been made and regulatory bodies, market makers, academicians and practitioners have unanimously have agreed upon the common notion that organized future market contain significant information for the prospective cash market price changes in the short run, irrespective of the fact that in the long run both market observe strong and stable co-movement. Price discovery is expected first take place in the future markets and then it transmitted to underlying cash market. (Pizzi et al; 1998). However, Wahab and Lashgari (1993), Chan and Lien (2001). Chen et al; (2002) Lin et al; (2002) Mukherjee and Mishra (2006), and Thomas (2006) have found contrary evidence suggesting that cash market serves as dominant market and future market behaves like satellite market. So there exists a dilemma. Thus this study seeks to analyse empirically the price discovery and causal relationship between spot and future market