A causal nexus between futures and spot with reference to stock 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 futures of NIFTY 50 on NSE in India for selected industry specific stock futures. For accomplishing the objective 14 select stocks on NIFTY 50 Index with industry specific 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. The sample used in this study includes daily future close prices and spot closing prices for 14 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 studied using econometric tools descriptive statistics, unit root test, granger causality co-integration and vector error correction method. 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.