Derivatives Trading and Its Impact on the Volatility of NSE, India
GEL : G10, G14, G20, G19

ABSTRACT

This article examines the impact of introduction of financial derivatives trading on the volatility of Indian stock market (an emerging stock market). It examines the theme that the introduction of derivatives in the stock market in India would reduce the volatility (risk) in the stock market. NSE Nifty 50 index has been used as a proxy of stock market return. ARCH/GARCH technique has been employed in the analysis. The conditional volatility of interday market returns before and after the introduction of derivatives products are estimated with the (GARCH) model. The Finding suggests that derivatives trading has reduced the volatility.

Executive Summary

Derivatives trading in the stock market have been a subject of enthusiasm of research in the field of finance the most desired instruments that allow market participants to manage risk in the modern securities trading are known as derivatives. The derivatives are defined as the future contracts whose value depends upon the underlying assets. If derivatives are introduced in the stock market, the underlying asset may be anything as component of stock market like, stock prices or market indices, interest rates, etc. The main logic behind derivatives trading is that derivatives reduce the risk by providing an additional channel to invest with lower trading cost and it facilitates the investors to extend their settlement through the future contracts. It provides extra liquidity in the stock market. In recent past, the volatility of stock returns has been a major topic in finance literature. Generally, volatility is considered as a measurement of risk in the stock market return and a lot of discussions have taken place about the nature of stock return volatility. Therefore, understanding factors that