International Journal of Financial Management

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A Testing of Lead-lag Relationship between Nifty Spot and Futures Index Returns and Volatility


Affiliations
1 Assistant Professor at Regional College of Management Autonomous, Bhubaneswar
2 Dean, MBA Department, Biju Patnaik University of Technology
     

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It has been almost a decade since the introduction of derivatives instruments in Indian bourses like Options and Futures trading replacing thereby age old Badla transactions and almost two decades since the introduction and implementation of liberalization, privatization and globalization policies in Indian economy. This has resulted in a sea change in growth and development of Indian economy and enhanced activity and trade in Indian stock markets. This paper examines and compares the reaction of futures and cash markets to the flow of information and tries to establish a lead-lag relationship between the two markets in terms of returns and volatilities being experienced by NIFTY and NIFTY futures indices in two different markets. Our results suggests that though there is a strong contemporaneous and bi-directional relationship among the returns in the spot and futures market, the spot market has been found to play comparatively stronger leading role in disseminating information available to the market, and therefore said to be more efficient. Apart from this, there is also interdependence (in both direction) and therefore symmetric spillovers among the stock return volatility in the spot and futures market.

Keywords

Lead-lag, VAR model, GARCH Model
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  • A Testing of Lead-lag Relationship between Nifty Spot and Futures Index Returns and Volatility

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Authors

Govind Chandra Patra
Assistant Professor at Regional College of Management Autonomous, Bhubaneswar
Shakti Ranjan Mohapatra
Dean, MBA Department, Biju Patnaik University of Technology

Abstract


It has been almost a decade since the introduction of derivatives instruments in Indian bourses like Options and Futures trading replacing thereby age old Badla transactions and almost two decades since the introduction and implementation of liberalization, privatization and globalization policies in Indian economy. This has resulted in a sea change in growth and development of Indian economy and enhanced activity and trade in Indian stock markets. This paper examines and compares the reaction of futures and cash markets to the flow of information and tries to establish a lead-lag relationship between the two markets in terms of returns and volatilities being experienced by NIFTY and NIFTY futures indices in two different markets. Our results suggests that though there is a strong contemporaneous and bi-directional relationship among the returns in the spot and futures market, the spot market has been found to play comparatively stronger leading role in disseminating information available to the market, and therefore said to be more efficient. Apart from this, there is also interdependence (in both direction) and therefore symmetric spillovers among the stock return volatility in the spot and futures market.

Keywords


Lead-lag, VAR model, GARCH Model

References