Effectiveness of Stock Futures Trading in Curbing Volatility of the Underlying Spot Prices: Evidence from NSE, India.

Too much volatility may create an impediment on the way of achieving pricing efficiency and hence vibrancy of a stock market. One of the important objectives of introducing futures trading in the stock markets of different developed and emerging economies, including India, is to bring stability in the price volatility of the underlying cash segment of the market. In a quest to find out whether stock futures trading in India succeeds in accomplishing that objective, the paper undertakes an examination of the price volatility conditions of seven highly liquid stocks traded on NSE market for the pre- and post-futures periods. Applying variance analysis of excess daily returns, OLS regression analysis and GARCH technique on the sample data, the study comes to a conclusion that the onset of single stock futures in the market has a declining effect on the price volatility of the underlying spot market, although the results of GARCH analysis reveal the triviality of such effect. Further the GARCH analysis suggests that the past information sets have a lingering impact on spot price volatility and return variances are even biased function of past information shocks. This suggests that, stock futures trading, although succeeds in curbing spot price volatility, fails to improve the price discovery mechanism of the underlying spot segment of the market.