Description
It is very well known that the Indian capital market has witnessed a major transformation and structural change from the past one decade as a result of ongoing financial sector reforms.
Introduction to Derivative Market
It is very well known that the Indian capital market has
witnessed a major transformation and structural change
from the past one decade as a result of ongoing financial
sector reforms. Dr. L.C.Gupta (2002) has rightly pointed out
that improving market efficiency, enhancing transparency,
checking unfair trade practices and bringing the Indian
capital market up to a certain international standard are
some of the major objectives of these reforms. Due to such
reforming process, one of the important step taken in the
secondary market is the introduction of derivative products
in two major Indian stock exchanges (viz. NSE and BSE) with
a view to provide tools for risk management to investors and
also to improve the informational efficiency of the cash
market.
Many emerging and transition economies had started
introducing derivative contracts since 1865 when the
commodity futures were first introduced on the Chicago
Board of Trade. The Indian capital markets have experienced
the launching of derivative products on June 9, 2000 in BSE
and on June 12, 2000 in NSE by the introduction of index
futures. Just after one year, index options were also
introduced to facilitate the investors in managing their risks.
Later stock options and stock futures on underlying stocks
were also launched in July 2001 and Nov. 2001 respectively.
In India, derivatives were mainly introduced with view to
curb the increasing volatility of the asset prices in financial
markets and to introduce sophisticated risk management
tools leading to higher returns by reducing risk and
transaction costs as compared to individual financial assets.
Though the onset of derivative trading has significantly
altered the movement of stock prices in Indian spot market,
it is yet to be proved whether the derivative products has
served the purpose as claimed by the Indian regulators. In an
efficient capital market where all available information is
fully and instantaneously utilized to determine the market
price of securities, prices in the futures and spot market
should move simultaneously without any delay.
However, due to market frictions such as transaction cost,
capital market microstructure effects etc., significant lead-
lag relationship between the two markets has been
observed. 7
As far as developed markets, such as USA, UK, Japan etc., are
concerned, a number of important and in-depth studies have
been carried out to examine the lead-lag relationship
between the spot and derivative, viz. futures market and also
to provide the possible explanations behind such relation
and its changes over time.
Therefore, the present study seeks to contribute to the
existing knowledge base and literature for examining the
actual lead-lag relationship among the Indian spot and
futures market in terms of returns for the time period Jan-
2007 to Dec-2008
doc_347844753.docx
It is very well known that the Indian capital market has witnessed a major transformation and structural change from the past one decade as a result of ongoing financial sector reforms.
Introduction to Derivative Market
It is very well known that the Indian capital market has
witnessed a major transformation and structural change
from the past one decade as a result of ongoing financial
sector reforms. Dr. L.C.Gupta (2002) has rightly pointed out
that improving market efficiency, enhancing transparency,
checking unfair trade practices and bringing the Indian
capital market up to a certain international standard are
some of the major objectives of these reforms. Due to such
reforming process, one of the important step taken in the
secondary market is the introduction of derivative products
in two major Indian stock exchanges (viz. NSE and BSE) with
a view to provide tools for risk management to investors and
also to improve the informational efficiency of the cash
market.
Many emerging and transition economies had started
introducing derivative contracts since 1865 when the
commodity futures were first introduced on the Chicago
Board of Trade. The Indian capital markets have experienced
the launching of derivative products on June 9, 2000 in BSE
and on June 12, 2000 in NSE by the introduction of index
futures. Just after one year, index options were also
introduced to facilitate the investors in managing their risks.
Later stock options and stock futures on underlying stocks
were also launched in July 2001 and Nov. 2001 respectively.
In India, derivatives were mainly introduced with view to
curb the increasing volatility of the asset prices in financial
markets and to introduce sophisticated risk management
tools leading to higher returns by reducing risk and
transaction costs as compared to individual financial assets.
Though the onset of derivative trading has significantly
altered the movement of stock prices in Indian spot market,
it is yet to be proved whether the derivative products has
served the purpose as claimed by the Indian regulators. In an
efficient capital market where all available information is
fully and instantaneously utilized to determine the market
price of securities, prices in the futures and spot market
should move simultaneously without any delay.
However, due to market frictions such as transaction cost,
capital market microstructure effects etc., significant lead-
lag relationship between the two markets has been
observed. 7
As far as developed markets, such as USA, UK, Japan etc., are
concerned, a number of important and in-depth studies have
been carried out to examine the lead-lag relationship
between the spot and derivative, viz. futures market and also
to provide the possible explanations behind such relation
and its changes over time.
Therefore, the present study seeks to contribute to the
existing knowledge base and literature for examining the
actual lead-lag relationship among the Indian spot and
futures market in terms of returns for the time period Jan-
2007 to Dec-2008
doc_347844753.docx