Testing Efficiency of Index Futures Markets during Volatile Times: Evidence from India

Abstract

This paper deals with testing the market efficiency of stock index futures in India. For the purpose of testing the efficiency, data have been collected for NIFTY spot and near-month futures for a period of 5 years. The tests for market efficiency include Causality test, Johansen Co-Integration test and Error Correction Mechanism. The paper examines efficiency of the stock index futures market during recent past when the Indian stock markethadundergone a very high level of volatility. Daily data from October 2009 to September 2014 pertaining to near month S&P CNX Nifty index futures contracts traded on the national stock exchange (NSE) has been analysed using a number of econometric models including co-integration tests with vector auto regression framework, causality testing and error correction mechanism. The key contribution of this paper is a detailed analysis of the causal relationship between spot and futures prices at the NSE by using the impulse response functions of the vector error-correction model which has enabled us to study the behaviour of series from real shocks during this period of intense volatility. The results show that despite high volatility the index futures and spot prices in India form a stable long-run relationship. The results will have important implications for trading of index futures contracts in India. The findings will also be of great use to financial managers dealing with stock index futures for hedging.