Introduction of Derivative Trading in India and Its Impact on the Volatility of Underlying Spot Market

Abstract

Equity derivatives have become popular financial products in Indian capita l markets since 2003. Trading on derivatives tend to make the underlying spot markets more liquid and informationally efficient. Despite the financial crisis in the year 2008 the turnover in derivative market was 4 times then that of s pot market. Volatility impact has been examined with the he! p of asymmetric GAR CH model. GJR GAR CH (1, 1) was used to model the heteoroskedasticity and examine the changes in the post introduction period . it is been found that the individual stocks became less volatile in the post introduction period. the short term more precisely in the following 2 years period . The decomposition of observed volatility indicates that the recent news as well as the past news exhibit greater impact on the stock prices in the pot introduction period . Volatility persistence also increased substantially in the post introduction period .