Informational Efficiency in Futures' Markets in India's National Stock Exchange

12 Pages Posted: 12 Feb 2007

Date Written: December 19, 2006

Abstract

This paper provides estimates of overall informational efficiency in futures markets on India's National Stock Exchange. We do not examine the price reaction to any public announcement. Instead, we invoke the Hellwig (1980) model, and exploit the property that for futures contracts the terminal value can be treated as observable, to obtain estimates of the overall signal to signal plus noise ratio in markets for single-stock and index futures on India's National Stock Exchange. The variance-covariance parameters governing futures prices and terminal values can be inverted to obtain estimates of the primitive parameters of the Hellwig (1980) model. This lets us identify the MLEs of the precision of private information and the variance of liquidity motivated trades. The signal to signal plus noise ratio - our measure of overall informational efficiency - is a function of these primitive parameters.

Our primary findings show that there is considerable variation across firms in these parameters despite only large active firms being available for futures trading. Overall informational efficiency is decreasing in univariate analyses with open interest and average daily trading volume in futures and the underlying equity. In a multivariate analysis it declines in open interest in the futures market and in the trading volume of the underlying equity but is increasing in the trading volume of in the futures market. The NIFTY index shows a higher signal to signal plus noise ratio than for any of the firms. This is consistent with the idea that less manipulability is associated with greater informational efficiency.

Keywords: Derivatives Markets, Market Efficiency, Hellvig Model

Suggested Citation

Cong, Yu and Krishnan, Murugappa (Murgie), Informational Efficiency in Futures' Markets in India's National Stock Exchange (December 19, 2006). 10th Indian Institute of Capital Markets Conference Paper, Available at SSRN: https://ssrn.com/abstract=962039 or http://dx.doi.org/10.2139/ssrn.962039

Yu Cong

Towson University ( email )

8000 York Road, ST 100A
Towson, MD 21204
United States

Murugappa (Murgie) Krishnan (Contact Author)

Yeshiva University ( email )

500 West 185th Street
New York, NY 10033
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
243
Abstract Views
1,574
rank
156,829
PlumX Metrics