This article examines two issues: (1) Price dynamics between spot and futures prices for stock (i.e., whether futures market leads the spot market or viseaversa in price discovery) and (2) Informational content of the basis (i.e., whether or not that information revealed by the basis has a signaling role in determining the direction of change in spot and futures prices). Using S&P CNX Nifty Index Futures, CNX IT index and ten stock futures, it is found that the basis reveals the direction of changes in futures prices and also to a much lesser extent, that of cash/spot prices. The authors, however, failed to find evidence that futures prices lead spot prices on a daytoday basis. It appears that the information is mostly aggregated in the spot markets and then transmitted to the futures market. Bidirectional causality with moderate feedback was noticed when longer lag periods are considered. The futures market converges much faster than the spot market does to the deviation of the equilibrium. Further, a major percent of the information content of the basis in a given day persist the following day; i.e., rate of convergence is relatively slow.

The dynamic price relation between equity spot and futures has been and continues to be of much interest to regulators, academicians, and practitioners alike for a number of reasons such as price discovery, market efficiency, arbitrage opportunities, etc. In efficient market, new information disseminating into the marketplace should be reflected immediately in spot and futures prices by triggering trading activities in one or both markets simultaneously so that there should be no systematic lagged response and therefore no arbitrage profit.

Previous research on the relationship between the equity index spot and futures prices (Stoll and Whaley, 1990; Herbst et al., 1987; Cheung and Ng, 1990; Chan et al., 1991; Chan 1992; Kawaller et al., 1987) found that in general, futures markets dominate and lead spot market price changes. This is also especially true in case of wheat, corn, orange and barley, where majority of the new information are first aggregated in the futures prices and then transmitted to spot prices. However, price discovery role for silver, oats, and copper are more divided between spot and futures markets.

Informational Content of the Basis and Price Discovery Role of Indian Futures Market, spot and futures prices, stock futures, academicians, price discovery, market efficiency, arbitrage opportunities, information content.