Impact of Index Futures and Options Introduction: A Case of Spot Market Volatility in BSE

Abstract

Derivatives in India were introduced in June 2000 with the introduction of stock index futures in the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). An important reason for the introduction of futures and options 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 Sensex from January 1, 1997 to December 31, 2007. This paper uses family of GARCH techniques to capture the time-varying nature of volatility and volatility clustering phenomenon in the data. The study found that there are no significant changes in the volatility of the spot market due to the introduction of index futures and options in the Sensex Index.