PRESENTATION ON

Behavior of Stock Market Volatility after Derivatives

SYNOPSIS OF THE ARTICLE

The article briefly discuss about the financial market liberalisation since early 1990s that have brought major changes

The creation and empowerment of SEBI has helped in providing higher level accountability in the market
The new institutions like NSEIL, NSCCL, NSDL, have been the change agents and helped cleaning the system and provided safety in investing public at large
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Microstructure changes brought reduction in transaction cost that helped investor to lock in a deal faster and cheaper One decade of reforms saw implementation of policies that have:

Improved the transparency in the system, Provided cheaper mode of information dissemination without much time delay, Better corporate governance, Prohibiting the insider trading and price rigging.

The objective has been to move the Indian market to such a level where it would fully integrate with the global developed markets.

INTRODUCTION

The article talks about the derivatives in Capital Market. The derivatives were first introduced on the basis of recommendation made by L C Gupta Committee report. The committee had recommenced in December 1997 the introduction of stock index futures in the first place to be followed by other products once the market matures.

The preparation of regulatory framework for the operations of the index futures contracts took some more time and finally futures on benchmark indices were introduced in: June June

2000 Futures on indices 2001 Options on indices

July

2001 Options on individual stock

2001 Futures on individual

November

OBJECTIVE OF THE STUDY

To study the behaviour volatility in Cash Market after introduction of derivatives. Impact of derivatives trading on the volatility of the cash market in India has been studied by:1.
2.

Thenmozhi (2002) lower level volatility in cash market.

Shenbagaraman (2003) there was no significances fall in cash market.

3.

Gupta and Kumar (2002) overall volatility of underlying market declined.

Raju and Karande (2003) decline in volatility of cash market.

4.

All these studies have been done using the market index and not individual stocks, Study has been done on the longer period of data to study the volatility of the derivative. The study use indices as well as individual stocks for analysis.

METHODOLOGY

The article used the daily stock market data from January 1999- October 2003.

Daily returns had been calculated by the following equation: Rt

= Log(Pt /Pt-1)/(n -1)

The standard deviation of returns had been calculated by the following method
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= (Rt )2 /(n -1)

Source of Data and Data characteristics

Two benchmark indices:

S&P CNX NIFTY, S&P CNX NIFTY Junior along with some stocks.

Time Period :January 1999 to October 2003. Total stocks:- 20 stocks

3 were single stock futures and option while 7 do not have the same).
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Whole data is divided into 6 blocks.

Full period from January 1,1999 October 31, 2003. (PD1) First sample period from January 1,1991- May 31, 2000.(PD2) Second sample period from June 1,2000- November 30, 2001.(PD3) Third sample period from December 1,2001- October 31, 2003.(PD4) Fourth sample period from June 1,2002- October 31, 2003.(PD5)

Fifth sample period from November 1,2002- October 2003.(PD6)

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The justification for the sub-periods is that they have given 6 months time after introduction of all available four products to sell down.

Futures on individual stocks and indices,

Options on individual stocks and indices.

The period from June 2000 to November 2001 as the intervening period during which various derivatives products were introduced in the market. Two method had been used to model the conditional volatility:1. 2.

GARCH IGARCH
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PROCESS

Run a GARCH estimation using dummy variable to ascertain the impact of derivatives on the Cash Market Volatility. Identified 4 relevant dates of event to control the dummy variable. The dummy variable is given a value:

0 Before the new derivatives product was introduced. 1 After the event date.
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RESULTS

Volatility that is measured by standard deviation has came down for most of the stocks.
Daily static standard deviation has fallen from 2.05%(annually 32.54%) to 1.19 (18.91%)for NIFTY. For NIFTY JUNIOR, the fall is from 2.69% (42.78%) to 1.34% (21.40%).
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IMPACT OF DERIVATIVE ON CASH MARKET

The volatility has come down in recent months, specifically in post derivative period. The reduction due to many reasons
The

Microstructure changes,

Robust

risk management practices followed by exchange to contain volatility,

derivatives on indices as well as on individual stocks.
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Introduction of

Events dates:1. 2. 3. 4.

June 12, 2000. June 4, 2001. July 2, 2001. November 9, 2001.

To study the impact of each event, they introduce dummy variable to ascertain their coefficients and find its statistical significance. RESULTS:-

1.

The event 1 is significant at 1% level with a negative coefficient of 0.23 that indicates the introduction of futures.
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CONCLUSION

By studying conditional volatility we observed that for most of the stocks, the volatility has come down in the post-derivative period.
All these methods suggested that the volatility of the market as measured by benchmark indices like S&P CNX NIFTY and S&P CNX NIFTY JUNIOR have fallen after in the post- derivatives period.
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The finding in the line with the earlier findings of Thenmozhi (2002), Shenbagaran (2003), Gupta and Kumar (2002) and Raju and Karande (2003) to the extent that there is a general fall in volatility after introduction of derivatives. The earlier studies used shorter period of data and pre- single stock futures and options period data.

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