Future Trading and Stock Market Volatility: A study of Bank Nifty

Futures are considered as important tool for risk hedging but it may add to the volatility of the market. The objective of this paper is to investigate the impact of future trading on volatility of stock prices of banking sector. The sample data consist of closing prices of Bank Nifty as well as closing prices of individual banks from April 1, 2003 to March 31, 2008. The study uses least square method and EGARCH model to capture the leverage effect and volatility clustering phenomenon of data. The evidences suggest that introduction of future doesn't affect volatility of Bank Nifty as well as individual banks except Axis, IDBI and ICICI banks. The result also shows the presence of leverage effect i.e. good and bad news doesn't have equal effect on volatility. This paper will contribute to evaluate the impact of future trading on stock market volatility of banking sector. Since this study is carried out on banking sector, it will not be easy to generalize the results and further research is required to evaluate how introduction of future trading affect other sectors.