Cause and effect relationship between future closing price, trading volume and open interest of Nifty stock index future contracts

Abstract

A rise in future closing price, trading volume and open interest indicates that the market is strong and in upward trend. While a fall in price and a rise in trading volume and open interest indicate that the market is weak and downward trend. When all three prices, trading volume and open interest are falling it indicates that the market is strengthening on the other hand, if price is rising but the trading volume and open interest are falling it said that the market is weakening. This paper makes an attempt to study the relationship between future closing prices, trading volume and open interest for Nifty Index near month, next to near month and far month contracts. Open interest is often used to know the trends and flow of money, the relationship between these three often indicates the changeof trend in the futures market. Granger causality test was adopted to assess the cause and effect relation between the variables. Thus the study provides the technicians utilize a three dimensional approach to futures market analysis.