SEBI DRG Study No. 3: Impact of Increased Derivatives-Trading in India on the Price-Discovery Process

Securities and Exchange Board of India released the Development Research Group (DRG) Study titled, Impact of Increased Derivatives-Trading in India on the Price-Discovery Process. The study is co-authored by Prof. Banikanta Mishra, Dr. Sarat Malik, and Laltu Pore.

About the Study

The objective of the study on Impact of Increased Derivatives-Trading in India on the Price-Discovery Process is to examine whether the introduction of financial derivatives led to better price-discovery (PD) in India.  Using synchronous daily spot, futures, and option price on Nifty and ten randomly selected stocks,  it has been found that, while the spot-market is increasing its dominance over futures and options, the futures market™s dominance over option-market has drastically fallen following the increase in STT. Further, this study is the first one to analyze individual stock-options in India. While the derivatives and spot markets exhibit a long-term relation, the present study found the existence of long-term relationship between futures and options on individual stocks, something none had hitherto studied.

The main recommendations of the study are as follows:

  1. The study found that spot-market has been dominating the futures and option markets and that the dominance of futures market over options has diminished after the increase in STT (Securities Transaction Tax).
  2. The Study proposed that the STT on protective-put and hedged-call positions should be reduced to give boost to the option market.

October 17, 2013

Tags: DerivativesFutures contractFutures exchangeIndiaOptionsPrice discoveryProfessorSecurities & Exchange Board of India

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