Abstract
This study offers a robust, long-term analysis of price discovery and the persisting lead-lag relationship between India’s equity futures and spot markets. Utilising monthly data from April 2005 to December 2022, it filters transient noise typically associated with high-frequency data. Information Share and Common Factor Weight methodologies within the Vector Error Correction (VEC) framework consistently reveal the dominance of futures markets in the price discovery process. The insights remain consistent across three distinct periods spanning the global financial crisis and the COVID-19 pandemic. The volatility dynamics and asymmetry effects in the Indian equity futures and spot markets using the Vector Error Correction - Exponential General Autoregressive Conditional Heteroskedastic (VEC-EGARCH) approach uncover notable asymmetry effects, signifying a strong market sensitivity to negative news. This highlights the necessity for comprehensive risk management strategies and stringent regulatory supervision, especially in light of the significant growth and systemic risks in the Indian derivatives market.
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