Financial Risk Management
An Empirical Study on the Volatility Impact of Equity Derivatives on Underlying Spot Market

Article Details
Pub. Date : March, 2020
Product Name : The IUP Journal of Financial Risk Management
Product Type : Article
Product Code : IJFRM10320
Author Name : Anu K M, P Chellasamy
Availability : YES
Subject/Domain : Finance Management
Download Format : PDF Format
No. of Pages : 9

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Abstract

The study examines the impact of equity derivative trading on the volatility of spot market in India. Monthly time series data for the period from January 1, 1996 to December 31, 2016 is used. The results from the Hausman test and structural break test provide support that there is a significant influence of the introduction of stock futures and stock option on the stock market volatility. High volatility of prices is considered as a major risk in derivative trading, but this situation benefits the investors. As the regulatory process continues, policymakers must seek to ensure that the derivatives market is a venue to manage risk, rather than a source of risk itself. Thus, the investor should be aware and understand that the derivatives are not risky, but it is the responsibility of the investors to ensure that the risks are effectively controlled and limited to the levels that do not pose any threat to their investment position, and consider it as a hedging tool instead of speculative tool.


Description

Since 1990, the Indian financial system has become increasingly global in nature. It was exposed to the global financial market through channels of financial integration, development in information technology and telecommunication. This process of globalization has been accompanied by increasing volatility and uncertainty in prices of many commodities and financial markets. As a result, some business risks like price risk, foreign exchange risk, etc. have gained prominence. The risk factor is an important concern for financial agents and to reduce the risk, the concept of derivatives comes into the picture. The financial market venture has always been to maximize returns and minimize risk. Derivatives are in the forefront of innovations in the financial markets with an aim to increase returns and reduce risk (Himanshu and Nilesh, 2013). They offer an outlet for investors to protect themselves from the vagaries of the financial securities markets.


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