Impact of Futures Trading on Volatility of CNX Nifty

Abstract

This paper focuses on the volatile behaviour in the equity market in individual stocks after the introduction of future trading on individual stocks. One of the innovations in financial markets in recent years has been the introduction of derivatives with the introduction of stock index futures. Futures and options play an important role in price discovery, portfolio diversification and hedging. This paper examines the stock market volatility of individual stocks listed on the S&P (US-based Standard & Poor's Financial Information Services) CNX (‘C’ stands for CRISIL, ‘N’ stands for NSE and X stands for Exchange or Index) Nifty index after the introduction of futures trading. It uses the family of generalised autoregressive conditional heteroscedasticity technique to capture the time-varying nature of volatility and volatility clustering phenomenon in the data. The empirical evidence suggests that in most of the stocks, there is no significant change in the volatility of stock market. But with regard to the information flow to the spot market, future trading has increased volatility.