Impact of Futures and Options on the Underlying Market Volatility: An Empirical Study on S&P CNX Nifty Index

Abstract

This paper provides a theoretical background to and empirical evidence of the impact of futures and options on the spot market volatility. This study is based on both closing and opening price returns. 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. Earlier studies have used different time-series techniques like GARCH, IGARCH, ECM, OLS, etc. to access the impact of derivatives on the spot market volatility. The present study uses family of GARCH techniques to capture the time-varying nature of volatility and volatility clustering phenomenon in the data. The empirical evidence suggests 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 been changed to some extent. However, the study 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.