In this paper, an attempt is made to investigate the effect of futures trading on the volatility and operating efficiency of the underlying Indian stock market by taking a sample of 15 individual stocks. The effect of the introduction of futures trading is examined using an extended period of June 1995 to June 2008.We employ an event study approach to test whether the introduction of index futures trading has resulted in significant change in volatility and efficiency of the stock returns. The result shows that the introduction of Nifty index futures trading in India is associated with both reduction in spot price volatility and reduced trading efficiency in the underlying stock market. The results of this study are crucial to investors, stock exchange officials and regulators. Derivatives play a very important role in the price discovery process and in completing the market. Their role in risk management for institutional investors and mutual fund managers need hardly be overemphasized. This role as a tool for risk management clearly assumes that derivatives trading do not increase market volatility and risk.
Futures, Financial Engineering, NSE Nifty, Event study, Market Efficiency
