Academic journal article Academy of Accounting and Financial Studies Journal

A Study on Impact of Banknifty Derivatives Trading on Spot Market Volatility in India

Academic journal article Academy of Accounting and Financial Studies Journal

A Study on Impact of Banknifty Derivatives Trading on Spot Market Volatility in India

Article excerpt

INTRODUCTION

Volatility is an integral part of stock market, where stock market index is considered as the pillar of a country's economic growth. The stock market indicates bullish and bearish phases where in the bullish market, attracts huge investments from domestic and foreign investors which leads to increase of stock values. In case of bearish-market stock value falls down and these variations in stock values determine the return on the stock market volatility. Volatility indicates variations in the values of instruments which could result in either gain or loss. Volatility is an obstruction for economic progress due to less investment in stock market. Assessing the value of securities relies on volatility from claiming each security. Volatility can be considered as Historical Volatility based on the past price movements of the security and Implied Volatility market and measured based on the result of information about the security.

The stock market volatility may be influenced by factors viz., inflation rate and interest rate, money related leverage, business earnings, profits plans, securities prices and socio-economic, political and macroeconomic variables like, international developments, economic progression, budget, general business environments, credit policies, etc. Trading volume monitored by arrival of new information regarding the securities or any kind of evidence that incorporate into value of the securities drives the volatility of the stock market.

Derivatives are innovative financial instruments, which facilitates the investors to invest in stock market instruments, which have high return potential and at the same time hedge against the volatility in the prices of such instruments. However, the primary objective of Derivative products is to manage/control/reduce volatility in the stock market and thereby improves the activity in the stock market transactions. In fact, 'Derivatives' are considered as the most important pillar for the economic growth, the other three pillars being stock market, banking and insurance sectors (Moses, 2013).

LITERATURE REVIEW

The study conducted on Impact for subordinate items exchanging with respect to spot market volatility, discloses that derivatives transaction in the securities market has mostly reduced the asymmetric response of volatility of spot market. Furthermore, TARCH model might have been discovered suitableness among the GARCH models (Nair, 2011). Also study discloses that, volatility of spot market had diminished after the introduction of index futures and options. Furthermore the currency futures had a disrupting impact on volatility of stock market depicted by GARCH model (Nandy, 2014). Other study (Sinha, 2015) utilizing GARCH model, demonstrates that volatility about spot market augmented after the introduction of derivatives. Another study compared the volatility during pre and post period of introducing derivatives using GARCH family and concluded TARCH model is better fit and found the presence of leverage effect and positive impact of volatility on returns for pre-derivative, post-derivative and the whole period (Singh, 2016). The other study was indicated that by the GARCH model test, it was observed that the volatility of spot market has decreased after the commencement of future contracts on the index (Singh and Tripathi, 2016). By keeping in mind of all the literature review, the current study is carried out to determine the effect of BANKNIFTY stocks derivative transaction on spot market volatility in India using GARCH model.

DATABASE AND METHODOLOGY

The objective of the investigation is to know the effect of individual bank stock futures on volatility of spot market about BANKNIFTY stocks.

Database

The period of study is from 1 April 2010 to 31 March 2017, which is chosen to observe the influence of trading of equity derivatives on spot market volatility after global financial crisis. …

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