Future closing price, trading volume and open interest: Evidence from stock futures and index futures of NIFTY 50 on NSE in India

Abstract

Futures are standardized contract between two parties to buy or sell an asset at a certain time in the future at a certain price. Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day. Open interest applies primarily to the futures market. Open interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts. Open interest measures the flow of money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a seller and a buyer combine to create only one contract. Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend (up, down or sideways) will continue. Technical analysis can easily see that the volume represents a measure of intensity or pressure behind a price trend. The greater the volume, the more we can expect the existing trend to continue rather than reverse. This paper makes an attempt to study the relationship between future closing prices, trading volume and open interest for Nifty Index and select 25 Stocks on Nifty 50 Index for near month contracts. Open interest is often used to know the trends and flow of money, the relationship between these three often indicates the change of trend in the futures market.