Empirical Evidence of the Causative Association Between Spot, Futures and Options Market: An ARDL Model Approach

18 Pages Posted: 7 Dec 2020

See all articles by Vaishali Jain

Vaishali Jain

Symbiosis Institute of Management Studies, Symbiosis International (Deemed University), Range Hills Road, Khadki, Pune 411020, India

Rahul Dahigude

Symbiosis Institute of Management Studies, Symbiosis International (Deemed University) Pune

Dr. Rajiv Divekar

Symbiosis International University - Symbiosis Institute of Management Studies

Date Written: December 5, 2020

Abstract

Purpose: The purpose of this paper is to explore and provide evidence about the nature of short run causal relationship as well as the speed of adjustment towards long run equilibrium between cash and FAO markets in India as represented by National Stock Exchange. The study uses individual stocks for studying the underlying relationship.

Design/Methodology: The paper makes use of the auto regressive distributed lag model to study the causal relationship between spot, futures and options markets. The study makes use of the 15-minute interval trades data for the purpose of analysis.

Findings: The ARDL model shows a long run relationship between spot, futures and options (both call and put) prices but we do not have sufficient statistical evidence to conclude the short run causal association between the variable except for call and put options.

Practical Implications: The results indicate that derivative markets are not leading the spot market but spot market contributes towards price discovery in the FAO markets. Potential investors can take their positions and design their portfolio in the cash and FAO segments using the insights provided by this piece of work.

Originality/Value: This paper is an original piece of work towards evidencing the causative association between spot, futures and options markets using individual securities. Matters pertaining to price discovery process in Indian financial markets are issues of interest for financial thinkers, traders, investors and financial analysts.

Keywords: Futures and options markets Autoregressive distributed lag (ARDL) model NSE Nifty and stock market derivatives Cointegration Granger Causality

Suggested Citation

Jain, Vaishali and Dahigude, Rahul and Divekar, Dr. Rajiv, Empirical Evidence of the Causative Association Between Spot, Futures and Options Market: An ARDL Model Approach (December 5, 2020). e-journal - First Pan IIT International Management Conference – 2018, Available at SSRN: https://ssrn.com/abstract=3743379 or http://dx.doi.org/10.2139/ssrn.3743379

Vaishali Jain (Contact Author)

Symbiosis Institute of Management Studies, Symbiosis International (Deemed University), Range Hills Road, Khadki, Pune 411020, India ( email )

Rahul Dahigude

Symbiosis Institute of Management Studies, Symbiosis International (Deemed University) Pune ( email )

Symbiosis Institute of Management Studies

Dr. Rajiv Divekar

Symbiosis International University - Symbiosis Institute of Management Studies ( email )

Range Hills Road
Khadki
Pune, Maharashtra 411020
India

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