An econometric analysis of the lead-lag relationship between India's NSE Nifty and its derivative contracts

摘要

Purpose - The purpose of this paper is to examine the lead-lag relationships between the NationalrnStock Exchange (NSE) Nifty stock market index (in India) and its related futures and options contracts,rnand also the interrelation between the derivatives markets.rnDesign/methodology/approach - The paper uses serial correlation of return series andrnautoregressive moving average (ARMA) model for studying the lead-lag relationship betweenrnhourly returns on the NSE Nifty index and its derivatives contracts like futures, call and put options.rnFurther, the lead-lag relation between hourly returns of the derivatives contracts among themselves isrnalso studied using ARMA models.rnFindings - The ARMA analysis shows that the NSE Nifty derivatives markets tend to lead thernunderlying stock index. The futures market clearly leads the cash market although this lead appears tornbe eroding slightly over time. Although the options market leads the cash overall, there is somernfeedback between the two with the underlying index leading at times. Further, it is found that thernindex call options lead the index futures more strongly than futures lead calls, while the futures leadrnputs more strongly than the reverse.rnPractical implications - The results imply that the derivative contracts on NSE Nifty lead thernunderlying cash market. Thus, the derivative markets are indicative of futures price movements andrnthis will certainly be helpful to potential investors to design their risk-return portfolio while investingrnin stocks and derivatives contracts.rnOriginality/value - This paper is an original piece of work towards exploring the lead-lag relationrnbetween NSE Nifty and the derivative contracts. The issue of price discovery on futures and spotrnmarkets and the lead-lag relationship are topics of interest to traders, financial economists, andrnanalysts.