Investigating the Price Discovery Efficiency of Indian Equity Futures Market

Abstract

Price discovery and risk transfer (i.e. hedging) have been considered as the pivot functions of the futures market. A market is said to be weak form efficient if the current market price and past price are uncorrelated (i.e. the asset price movements are random). A market is known as semi-strong efficient, if it absorbs and reflects the market information as well as the public information (viz., corporate actions, political announcement, etc.). Strong form efficient market is one which neglects the chances of even insiders to make abnormal profits on the basis of first hand information. Efficient price discovery in the futures market has many advantages for the traders as well as for the regulators. The current study is an attempt to investigate whether Indian equity futures market is efficient and to study whether it provides any significant information during the highvolatility period.

Estimating Optimal Hedge Ratio and Hedging Effectiveness in the NSE Index Futures

“…The stationary behavior of the Indian equity futures and cash markets implies that the market is weak and only informed investors and speculators can exploit the speculative and arbitrage opportunities available in the market. These findings are consistent with the finding of authors who have already worked on the same hypothesis in the Indian capital markets (Barua, 1981; Gupta & Singh, 2006a; Marisetty, 2003; Mishra, 1999).…”

“…The significant error correction term suggest that in order to re-establish market equilibrium, futures markets have to make adjustments as compared to cash market. The findings that cash market leads futures market in India are consistent with the findings of Gupta and Singh (2006b).…”

Impact of Liquidity on the Futures‐Cash Basis: Evidence from the Indian Market

“…Recent examples include Shastri, Thirumalai, and Zutter () who argue that SSFs enhance the quality of the market for the underlying stocks, and Danielsen, Van Ness, and Warr () who document that introduction of SSFs facilitates short‐selling activity. In the context of Indian financial markets, Kumar and Tse () and Gupta and Singh () find evidence consistent with a significant role for SSFs in price discovery.…”

“…The dummy for the trading day preceding a holiday and the dummies for the last four days of SSF contracts have negative coefficients. Gupta and Singh () report conflicting evidence on the behavior of pricing errors. They find that pricing errors are negatively related to days to expiry.…”

“…The dummy for the first day of SSF contracts has a positive coefficient indicating that the absolute basis is larger at the inception of SSF contracts. Gupta and Singh () attribute the large pricing errors on Fridays to this effect. The residuals of this regression constitute the adjusted absolute basis series.…”