Are sensex futures riskier than sensex?

Abstract

In this paper, an attempt has been made to measure the Indian Stock Market risk using BSE Sensex and Index Future. Stock Index futures are the most popular financial derivative instrument which is widely traded on exchanges. The changes of the prices in Stock Indexes are reflected in the Stock Index Futures. Stock index futures are the derivative instruments used to hedge the stock index risk. But we often fail to understand how risky is the hedging instrument itself than its underlying asset. Historical Value at Risk methodology has been used at 90 percent, 95 percent and 99 percent confidence level to assess the market risk for the period from January 2007 to December 2012. Historical VaR method is one of the simplest form of calculating Market Risk which considers that past is a good indicator of future. Findings show that Index Futures are riskier than the underlying asset i.e. Sensex. But Historical VaR method has failed in the prediction of 1 day and 10 days VaR for the spot market at all confidence levels. Overall, the study reveals that futures market tends to reflect more volatility than the spot market.