Derivative Trading and Stock Market Volatility: an Empirical Analysis

Abstract

The liberalization and the integration of capital markets at the international level has created new investment opportunities which in turn require the development of new instruments that are more efficient to deal with the increased risk of cross-border contagions. As such derivative instruments have been introduced in capital markets. This paper examines the impact of introduction of financial derivatives trading on the spot market volatility of Indian stock market. Using the GARCH model estimation techniques, the conditional volatility of inter-day market returns before and after the introduction of derivatives products have been estimated. The results provide the evidence of no significant change in the volatility of S&P CNX Nifty index. Such evidence may be due to the recent year's economic and financial crises.