Financial Risk Management
Causality Relationship Between Spot and Futures Markets: Evidence from India

Article Details
Pub. Date : Mar, 2019
Product Name : The IUP Journal of Financial Risk Management
Product Type : Article
Product Code : IJFRM51903
Author Name : Karamjeet Kaur
Availability : YES
Subject/Domain : Finance Management
Download Format : PDF Format
No. of Pages : 09

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Abstract

This paper makes an attempt to find out the causal relationship between spot and futures markets of Bombay Stock Exchange (BSE) of India. The study is based on secondary data. Unit root test, Johansen cointegration test and Granger causality test have been used for data analysis. The tests have been carried out based on the daily closing prices of BSE Sensex with its near futures index contracts for the period of five years from January 2011 to December 2015. The findings of the study indicate existence of cointegration between spot and futures market and the price movements of spot and futures are similar. Further, the study identifies unidirectional causality from spot market to futures market of BSE, which implies that spot market leads the futures market.


Description

Since the introduction of stock index futures in the US in 1982, researchers have studied the relationships and interactions between stock market spot price index and stock market futures price index. Introduction of derivative products has been one of the most important development in Indian capital markets. On the recommendations of L C Gupta Committee, trading of equity futures started with introduction of index futures on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) on June 12, 2000. Stock index futures and stock futures may influence spot prices if they have a cause on the actions of investors. Since futures markets provide hedge to investors against the price risk, the existence of futures may affect an investor’s investment strategies. In other words, the futures prices may have information about predictable demand that can affect investment decisions.


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