Financial Derivatives: Implications for the Indian Capital Market

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Capital market volatility is a significant indicator of effect of derivative trading. High volatility can cause mis-allocation of resources in spot market and lead to losses. In extreme case, it can destabilize the market to an extent that a crisis-like situation can develop. Hence, regulators and policy makers in India have always been interested in knowing the status of volatility, especially, after introduction of derivative trading in India. This work proposes to use GARCH and three asymmetric models viz., TGARCH, EGARCH, PGARCH models to evaluate the long-term impact and implications of derivatives. It gives a comprehensive analysis of impact of derivatives and its expiration on all the three popular variables of capital market, viz., return, volume and volatility using both primary and secondary data. Not only this, we also explore the impact on inter-play of these variables, i.e., we also explore the volume-return link, volume-volatility link and risk-return relationship.