Relationship between spot and future closing prices with reference to stock and index futures of NIFTY 50 on NSE in India

Abstract

This study investigates whether there exists a relationship between spot and future closing prices for stock and index futures of NIFTY 50 on NSE in India. For accomplishing this objective Nifty 50 Index & 25 select stocks on NIFTY 50 Index traded on NSE India for a period from April 2005 to December 2015 considering the inclusions and exclusions from the Nifty 50 Index constituents during the study period are considered. The sample used in this study includes daily future close prices and spot closing prices for Nifty Index & 25 select stocks traded on NSE (www.nseindia.com). Since most of the trading activity takes place in near month contracts, only near month contracts are examined using econometric tools descriptive statistics, unit root test, granger causality and vector error correction. The analysis reveals there exists bidirectional relationship between spot and futures markets. The study also provides the evidence of long-run equilibrium relationship between the spot market price index and its futures price. It implies that either of these two historical prices will help to forecast the other.