Maturity and Volume Effects on the Volatility: Evidences from Nse Fifty Futures
19 Pages Posted: 9 Feb 2007
Date Written: December 19, 2006
This study attempts to examine the volatility dynamics and investigate the Samuelson Maturity Hypothesis, a source of non-stationary in volatility of futures price in the context of Indian Futures Market, by taking Nifty Index Futures traded on NSE. The data sample consist of daily closing price, volume and open interest of Nifty index futures from the period January 1, 2002 to December 29, 2005 for near month contract with 1009 sample data points. We construct data sample for time-to-maturity by rolling or switching over to the next maturing contract four days before the expiration date. For empirical analysis, ARMA-GARCH, ARMA-EGARCH models have been estimated. The empirical evidence suggests that there is time-varying volatility, volatility clustering and leverage effect in Indian futures market. This study does not provide support for the Samuelson Hypothesis in Indian futures market. The coefficient of the time-to-maturity variable is found to be insignificant. With respect to volume-volatility relationship, the results indicate a clear acceptance of Mixtures of Distribution Hypothesis i.e. there is positive contemporaneous relationship between futures prices volatility and volume. Hence this study concludes that time-to-maturity is not a strong determinant of futures price volatility, but rate of information arrival proxyed by volume and open interest are the important sources of volatility.
Keywords: Samuelson Maturity Effect, Nifty Index Futures, Volatility, Volume Effect, GARCH, EGARCH
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