Price Discovery and Volatility Spillovers in Klci Furures and Spot Market

Title: RELATION BETWEEN SPOT AND INDEX FUTURES MARKET IN INDIA

Author: Manmohan Mall, R. K. Bal, P. K. Mishra. 

Journal: International Journal of Research in Finance & Marketing (IJRFM)  http://www.mairec.org

Volume: 2, Issue 2, (ISSN 2231-5985).

Date: February 2012.

I. The Main Issue:

Generally, in an efficient market where the transaction cost and asymmetry information are relatively low, the change in one market has a direct effect on the other. In order to assess this hypothesis in an emerging market, Mishra(2012) and others attempt to examine the lead-lag relationship between spot and index futures market in India. This type of relationship precisely reflects how fast each market reacts to market wide information, and how well their co-movements are indicated. In other words, if one market reacts faster to the market wide information than the other, there will be a lead-lag relationship that is expected to be observed in data.

II. The Mathematical Model:

ΔSt = f (ΔSt-i , ΔFt-j , Zt-1)

ΔFt = f (ΔFt-j , ΔSt-i , , Zt-1)

III. The Econometrical Model:

Vector Error Correction Model:

IV. The Data:

The data used in this study are secondary data extracted from national stock exchange ltd of India, row data sets are employed prices of spot and futures stock index at daily basis covered the period June 12, 2000 to May 201.

V. Findings of This Study:

1. Both times series for Nifty index and Nifty based index futures prices were found stationary at first differences at 1%, 5% and 10% level of significant based on augmented dickey- fuller unit root test.

2. Johansson’s Trace and Maximum Eigen value tests detect that there is a long run relationship between spot and future stock index.

3. In the short run, estimates VECM regression indicates that there is unidirectional causality from spot market to future market this result is also supported by granger causality test.

VI. Implication:

The study found that either of these...