Price Discovery Process in Nifty Spot and Futures Markets: Kapil Choudhary Sushil Bajaj

Article
Military-Madrasa-Mullah
A Global Threat Complex 55
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Price Discovery Process in Nifty Spot Global Business Review

14(1) 55–88
and Futures Markets © 2013 IMI
SAGE Publications
Los Angeles, London,
New Delhi, Singapore,
Washington DC
DOI: 10.1177/0972150912466444
Kapil Choudhary http://gbr.sagepub.com
Sushil Bajaj
Abstract
This article investigates the role of price discovery in the Indian stock market by taking into consideration
41 individual securities and Nifty. The present article reports a study based on the daily adjusted closing
price of spot and futures for the time period between June 2000 and August 2010 (index) and from
November 2001 to August 2010 (individual stocks). To analyze the price discovery role, Engle and
Granger’s Residual Based approach, Johansen’s cointegration test and VECM (Vector Error Correction
Model) are used. The results depict that futures price series leads the spot price series in case of
Nifty and 21 stocks, and 20 stocks’ future price series is led by spot price series. As far as causality is
concerned, 14 stocks show feedback causality, 21 stocks including Nifty show unilateral causality and
7 stocks show absence of causality. This study also finds that both the markets, i.e., futures and spot, play
an important price-discovery role, implying that futures (spot) prices may contain useful information
about spot (futures) prices.
Keywords
Cointegration, causality, price discovery
Introduction
The purpose of a futures contract is to reduce the volatility by increasing the speed of flow of information
between the spot market and futures market. Still, an equivocal situation exists in terms of which market
is a leading market, whether the spot market is leading the derivative market or vice versa. Here, leading
market means the market that generates the price of an asset. The vital issue of a market for derivative
products of any asset class is the further information content that may be extracted from the prices evolv-
ing in this market. Thus, in addition to traditional role of risk reduction, futures markets also assume a
greater role in the aggregation of information and price discovery. Price discovery is a process through
which spot and futures markets congregate towards the efficient price of the underlying asset.
Kapil Choudhary is Assistant Professor at the Department of Commerce, Chaudhary Devi Lal University, Sirsa,
Haryana, India. E-mail: kapilcdlu@gmail.com
Sushil Bajaj is Research Scholar at the Department of Commerce, Chaudhary Devi Lal University, Sirsa, Haryana,
India. E-mail: ggnbajaj@gmail.com
India Quarterly, 66, 2 (2010): 133–149

56 Kapil Choudhary and Sushil Bajaj
Theoretically when two markets encounter the same information simultaneously, the two markets should
react in a similar fashion at that moment. The divergence between the reactions forces one market to play
a leading role over the other market. The leading market is considered as contributing a price discovery
function and a lead–lag relation emerges in case of price adjustments. The futures market, which is con-
sidered to be more responsive to the new information than the spot market, serves as a price discovery
vehicle for investors in the spot market. Due to trading cost advantage, greater liquidity and fewer
restrictions, the futures market reacts faster to information and is expected to play a dominant role in
price discovery. Therefore, a lead–lag relation between futures and spot market returns is of interest to
academics, professionals and regulators for a variety of reasons. First, this issue is related to market
efficiency since in efficient markets, informed investors are indifferent between trading in either market.
Furthermore, empirical evidence indicates that the futures market provides the function of price discov-
ery which means futures prices should contain useful information about the subsequent spot price. The
present study tries to explore the issue of relative contributions of spot and futures markets to the process
of price discovery. The purpose of this study is to examine the price discovery between the S&P CNX
Nifty and its corresponding futures and 41 individual securities and their corresponding futures. The
period analyzed is from 2000 to 2010 (index) and 2001 to 2010 (individual stocks). The study applies the
VECM (vector error correction model) to identify the relative contributions of the spot and futures
markets in the price discovery process.
Review of Literature
A vast body of academic and professional research has been devoted towards the lead–lag relationship
between returns and volatilities in the spot and futures markets, particularly in the developed econo-
mies. Kawaller et al. (1987) studied the intraday price lead–lag relationship between S&P 500 futures
and S&P 500 index using three-stage least squares regression method and concluded that futures price
movements led the index movements by 20 to 45 minutes while movements in the index rarely affected
futures beyond 1 minute. Almost similar results were exhibited by Kutner and Sweeney (1991) and
Chan (1992) by taking into account the intraday (minute by minute) data of S&P 500. Jong and Donders
(1998) used the high frequency data of cash, futures and options market of the Netherlands to deter-
mine the lead–lag relationship among the markets and found that due to the infrequent trading in the
cash market, smaller transactions cost and larger leverage effect in the futures market caused options
and cash market to be led by the futures market. Frino and West (1999) investigated the lead–lag rela-
tionship between the stock indices and stock index futures in the Australian market (ASX) and con-
cluded that the futures market led the cash market, though the presence of feedback from the cash
market to the futures market was also observed. Alphonse (2000) investigated the price discovery
mechanism of cash index and futures market of France and concluded that mispricings originated
mainly from information arrivals in the futures markets and that in turn these mispricings induced stock
price adjustments related to information transmission from the futures to the spot market. Empirical
evidences suggested that at least 95 per cent of the price discovery was achieved in the futures market.
Raju and Karnade (2003) investigated the price discovery role between Nifty futures and the cash mar-
ket using Johansen’s cointegration test and VECM and reported the dominant role of the futures market
Global Business Review, 14, 1 (2013): 55–88

Price Discovery Process in Nifty Spot and Futures Markets 57
in the price discovery process. So and Tse (2004) supported the principle that the futures market
contains most of the information, followed by the cash market, in the price discovery process in the
Hang Seng spot and futures index. Therefore, this goes to establish and cement the contention that the
futures market, which possesses a lot more information, leads and guides the spot market. Gupta and
Singh (2006) examined the efficiency of the Indian equity futures market consisting of Nifty and
24 individual securities by considering price discovery as the predominant feature of the efficient
futures market and argued that in the event of high fluctuations, the futures market provided significant
information regarding the prospective move in the cash market. Hence, the futures market was pro-
nounced to be leading market. Mukherjee and Mishra (2006) established the strong contemporaneous
and bidirectional relationships between the Nifty spot and futures markets. Debashish and Mishra
(2008) demonstrated the leading role of Nifty futures and options in the price discovery process using
the intraday data; besides this, feedback relationship was also found between the cash market and the
put option with a lead and lag of up to an hour. Kim et al. (2008) empirically investigated the intraday
relationship between stock index returns and implied index returns estimated from the Korean KOSPI
200 index options market and revealed that the stock index strongly led both call and put options.
Aydemir and Demirhan (2009) examined the causal relationship between Turkey’s stock prices and
exchange rates and indicated a bidirectional causal relationship between exchange rate and all stock
market indices. Floros (2009) examined the price discovery between futures and spot market traded in
the South Africa Stock Exchange (JSE) and Futures Exchange (SAFEX) for the period from 2002 to
2006 and found bidirectional causality between futures and spot prices. Besides this, it was also evi-
denced that futures and spot played a strong price discovery role implying that futures (spot) prices may
contain useful information about spot (futures) prices. Karmakar (2009) examined the price discovery
role of Nifty futures and spot markets and concluded that besides lower transaction costs and ease of
leverage, the futures market’s absence of short selling restriction feature has made the futures market
more attractive which causes a very high volume of trade in this market. Therefore, due to the high
volume of trade in the futures market, information is coming into this market more rapidly than the spot
market and that makes the futures market a leading market. Mahalik et al. (2009) examined price dis-
covery in Indian spot-futures commodity markets (MCX) by using Johansen’s Cointegration and
VECM Model and reported the flow of information from futures to the spot commodity markets but the
reverse causality did not exist which made futures market a leading market. Moonis (2009) investigated
the lead–lag relationship between the Nifty futures and Nifty spot index and empirical findings sug-
gested that the spot market led the futures market. Pradhan and Bhat (2009) found that the Indian
derivative market is at an immature stage and traders and investors are still confused about this market
due to the complexity of the derivatives contracts. Therefore, the Nifty spot market led the futures mar-
ket. Rosenberg and Traub (2009) monitored cash-futures interaction in foreign currency futures by
considering Chicago Mercantile Exchange. The relationship between intraday exchange rate move-
ments in cash and futures was examined during 1996 and 2006. It was found that earlier in 1996, futures
price changed mostly led those in the cash market but due to increased transparency of the cash FX
market in 2006, the direction of influence was largely reversed. Therefore, this study has shown mixed
results, i.e., earlier in 1996, futures market was leading the spot market but in 2006, spot market was
leading the futures market. Mallikarjunappa and Afsal (2010) analyzed information-based superiority
of markets for exploring arbitrage opportunities and attempted to determine the lead–lag relationship
between the spot and futures markets by considering high frequency price data of 12 Indian securities

and found a contemporaneous and bidirectional lead–lag relationship between the spot and futures
markets and price discovery occurred in both the markets simultaneously. The conclusion from the
literature reviewed therefore is that lower transaction costs, ease of leverage and absence of short sell-
ing restrictions in the futures market encourage investors and traders towards operating in the futures
market and that is increasing the number of trades in the futures market, which causes processing of
information in the futures market faster than in the spot market. Some research has shown the spot
market as the leading market, the reason behind this output could be the complexity of the derivatives
market, due to which investors and traders prefer to trade in the spot market, which increases the flow
of information in the spot market.
Research Methodology
Data Source and Time Period

Index futures on S&P CNX Nifty were permitted for trading on the National Stock Exchange (NSE)
from June 2000 and on individual stocks, derivative trading started on 9 November 2001. For the pur-
pose of the present study, S&P CNX Nifty and 41 stocks have been considered. Daily adjusted closing
values of the spot and futures market of the index and 41 stocks have been obtained for the period from
12 June 2000 to 31 August 2010 (index) and from 9 November 2001 to 31 August 2010 (individual
stocks). Two criteria have been considered for the selection of 41 securities. First, availability of data has
been taken into account, i.e., stocks of only those companies have been preferred in which derivative
trading had started on or before the year 2005 and second, market capitalization has been considered, i.e.,
the contribution of sample securities (41 securities) to the complete market capitalization of Nifty is
58.45 per cent. Besides this, it is also appropriate to mention that at present, derivative trading is taking
place in 226 securities and sample securities’ (41 securities) contribution to the market capitalization of
226 securities is 40.48 per cent. In case of the Indian derivative market, three period contracts are avail-
able, namely, near-month contract, mid-month and far-month contract. The present study has used the
near-month contract as the maximum trading is being done only in the near month. The data has been
taken from the financial market database Metastock.
Returns have been calculated as given in Equation (1) below:
Rt = ln (Pt /Pt – 1) (1)
where Pt is the present price and Pt–1 is the previous day’s price.
Unit Root Test

Since this article deals with time series data, the biggest issue with the time series data is non-stationarity.
In the absence of stationarity, hypothesis test results will be spurious. In order to check the presence of
unit root and determining the order of differencing required to bring stationarity, this article uses the
Augmented Dickey–Fuller test (ADF) and Phillips–Perron (PP) test.

Engle and Granger’s Cointegration Test (Residual-Based Approach)

The concept of cointegration was first introduced by Granger (1981). According to Engle and Granger
(1987), cointegration is an econometric technique for testing the relationship between non-stationary
time series variables. If two time series are non-stationary, that is, they have stochastic trend but their
linear combination is stationary, I(0), so to speak, the linear combination cancels out the stochastic trends
in the two time series. In this case, the two time series are said to be cointegrated (Gujarati and Sangeetha,
2007). Following the idea, this article has run the regression mentioned in equation (2) below. Residuals
are then tested for cointegration. The Augmented Dickey-Fuller test (ADF) and Phillips–Perron test (PP)
have been used for this purpose.
With two time series, futures price series (Ft) and spot price series (St), each of which is I (1), the
cointegration regression equation is:
Ft = α + βSt + µt (2)
where Ft is regressed on a constant α and St. β is the regression coefficient and µt is the residual or error
term. Now the spot price series and futures price series are said to be cointegrated only if µt is stationary.
Table 3 shows the results of stationarity of the residuals.
Granger Causality Test

A statistical approach proposed by Clive W. J. Granger (1969) to infer the cause and effect relationship
between two (or more) time series is known as Granger Causality. Granger Causality is based on the
simple logic that effect cannot precede cause. The Granger Causality test is based on the bivariate regres-
sion model:
n n
St = ∑ α i Ft − i + ∑ βj St − j + µ1t (3)
i =1 j =1
n n
Ft = ∑ λi Ft − i + ∑ δ j St − j + µ2t (4)
i =1 j =1
where Ft is the futures price return series and St is the spot price return series; λi, δj, αi and βj are the coef-
ficients of the respective variables; µ1t and µ2t are the error terms assumed to be uncorrelated.
If all the coefficients of Ft in the regression equation (3) of St, i.e., αi for i = 1......i are significant, that
is, the null hypothesis Ft does not cause St is rejected, then it can be said there is a causality from futures
to spot. If only one of the two variables causes the second variable but the second variable does not cause
the first variable, it is called one-way causality. If both the variables cause each other, it is called feed-
back causality. However, the significance of the coefficient is evaluated with the help of the F-statistic.

Johansen’s Cointegration and Vector Error Correction Model

An alternative approach to test for cointegration was proposed by Johansen (1988) and Johansen and
Juselius (1990) using the maximum likelihood approach. Johansen’s test is considered the most powerful
test among the various tests presently available. The test for cointegration between the two series is done
by considering the rank of the Π matrix via its eigenvalues. In Johansen’s procedure, the eigenvalues are
arranged in descending order.
λ1 ≥ λ2 ≥ λ3 ≥ ........... ≥ λn (5)
where λ1 is the largest value and λn is the smallest one.

There are two test statistics for cointegration under the Johansen approach using maximum likelihood
statistics:
The Lamda Max (λmax) Test
This test examines the null hypothesis that the cointegration rank is equal to r against the alternative
hypothesis that the cointegration rank is equal to r+1. The test statistic is calculated as follows:
λmax (r, r + 1) = –T ln (l – λr+1) (6)
where λ is the eigenvalue.

The test is repeated for r = 1 .....k until one fails to reject the null hypothesis.
The Lamda Trace (λtrace) Test

This test examines the null hypothesis that the cointegration rank is equal to r against the alternative
hypothesis that cointegration rank is k or greater than r. The test is conducted in inverse sequence, that is
r = k, k – 1, k – 2.....0. The test statistic is computed as follows:
k
λtrace (r) = –T ∑ ln (1 – λ )
i = r +1
i
(7)
In the above two equations, r is the number of cointegration vectors and λi is the estimated value
for the ith ordered eigenvalue from the ∏ matrix. Table 5 shows the result of Johansen cointegration.
The test of cointegration basically examines whether there exists a stationary linear combination of non-
stationary variables. If such a combination is found, it is inferred as an equilibrium relationship between
the variables. This equilibrium relationship is then used to construct an error correction model (ECM).
An error correction model is a statistical specification of economic dynamics through which the pull and
push forces restore the equilibrium relationship whenever a disequilibrium takes place. Engle and

Granger (1987) state that if the spot and futures price series are cointegrated, then causality must exist at
least in one direction. This causality can be identified with the help of the vector error correction model
(VECM). To test the causality VECM may be estimated using OLS in each equation.
p −1 p −1
∆St = α s , 0 + ∑ α s ,i ∆St − i + ∑ bs ,i ∆Ft − i + α s Z t −1 + es ,t (8)
i =1 i =1
p −1 p −1
∆Ft = α F , 0 + ∑ α F ,i ∆St − i + ∑ bF ,i ∆Ft − i + α F Z t −1 + eF ,t (9)
i =1 i =1
where αs,o and αF,o are intercept terms; αs,i, αF,i, bs,i and bF,i are the short-run coefficients and Zt–1 is the
error correction term derived from the cointegration equation.
In the above two VECM equations (8) and (9), Ft granger causes St if some of the bs,icoefficients are
significant and αs is also significant. Similarly St granger causes Ft if some of the bf,i are significant and
αF is also significant. t – test is used to test the hypothesis for the significance of the error correction
coefficients and F – test is used to test the joint significance of lagged estimated coefficients. The number
of lags in the model is identified using the Akaike and Schwarz Bayesian information criterion. If both
αs and αF are significant, it means there is two-way or feedback relation between the two markets. With
the help of αs and αF, the direction of causality, speed with which correction is taking place and identifi-
cation of the leading/lagging market is possible.
Empirical Results and Discussion
Descriptive Statistics
Table 1 depicts the results regarding descriptive statistics of the sample securities and Nifty in the spot
and futures markets. In the spot market, MTNL shows the lowest daily mean return (–0.03 per cent),
whereas BHEL shows the highest daily mean return (0.16 per cent). In the futures market MTNL again
shows the lowest (negative) daily mean return having a similar value, i.e., –0.03 per cent and
BHEL shows the highest mean return, i.e., 0.16 per cent. Standard deviation measures the historical
volatility of the security. In case of the equity market, ITC is the safest security with a standard devia-
tion of 1.98 per cent, while Bank of India proves to be the most risky security by showing the highest
standard deviation among all securities, i.e., 3.40 per cent. Similar results are noted in the futures
market: ITC again emerges as the safest security with a standard deviation of 1.95 per cent and TCS is
found to be the most risky security with a standard deviation of 3.50 per cent. In case of Index, i.e.,
Nifty, no change has taken place in the mean return in the equity and the futures market, i.e., 0.057 per
cent but standard deviation results depict higher variability in the futures market, i.e., 1.79 per cent as
compared to equity market, i.e., 1.69 per cent. As far as skewness is concerned, around 80 per cent of
the sample securities in equity and futures are negatively skewed, thus violating the assumption of
normal distribution. Furthermore, all the sample log returns are leptokurtic in nature because kurtosis
value exceeds 3.

Table 1. Descriptive Statistics
Standard
Company Returns Minimum Maximum Mean Deviation Skewness Kurtosis
ABB Ltd. Equity –0.186006 0.207941 0.000989 0.025196 0.015581 10.05205
Future –0.210799 0.215005 0.000990 0.026350 –0.122084 10.85197
ACC Equity –0.160566 0.126885 0.000880 0.023546 –0.337138 6.711813
Future –0.162688 0.145727 0.000875 0.024046 –0.355759 6.924983
Ambuja Equity –0.123650 0.138617 0.000867 0.023451 0.006932 6.281231
Cement Future –0.120557 0.157711 0.000859 0.023815 0.030223 6.491180
Andhra Equity –0.201160 0.156017 0.000776 0.028547 –0.251254 8.033128
Bank Future –0.204079 0.165658 0.000768 0.029164 –0.302729 8.404528
Ashok Equity –0.240172 0.165658 0.000951 0.029521 –0.138288 8.961525
Leyland Future –0.239786 0.154844 0.000949 0.030174 –0.227162 8.589394
Aurobindo Equity –0.248154 0.177825 0.000968 0.029434 –0.433842 11.58881
Pharma Future –0.248485 0.176966 0.000966 0.029401 –0.417487 10.88836
Bank of Equity –0.240983 0.179389 0.001052 0.030617 –0.150758 8.829686
Baroda Future –0.311393 0.230854 0.001043 0.031621 –0.316880 13.21517
Bank of Equity –0.177640 0.202495 0.001343 0.034088 0.040422 5.877377
India Future –0.177661 0.180382 0.001332 0.034125 –0.067416 5.775351
Bharat Equity –0.175745 0.151444 0.001168 0.024549 –0.003616 7.963533
Electrical Ltd. Future –0.197124 0.193659 0.001166 0.025728 0.077697 10.43516
Bharat Forge Equity –0.167433 0.167237 0.000309 0.029002 0.284766 7.510718
Future –0.156717 0.162649 0.000324 0.029625 0.128835 6.880296
BHEL Equity –0.234392 0.166012 0.001616 0.025448 –0.051022 9.331531
Future –0.684195 0.699332 0.001617 0.033144 0.129340 176.7434
BPCL Equity –0.225118 0.164031 0.000675 0.027306 0.086785 7.615799
Future –0.224519 0.162696 0.000677 0.027570 0.129088 8.360345
Canara Bank Equity –0.158322 0.152226 0.000923 0.030584 –0.088314 6.060310
Future –0.177137 0.158320 0.000910 0.030550 –0.211317 6.651374
Cipla Equity –0.154611 0.102180 0.000607 0.020570 –0.287176 8.003705
Future –0.152333 0.121861 0.000609 0.020596 –0.306215 8.737974
Dabur Equity –0.698255 0.183793 0.000776 0.030615 –8.684980 204.7968
Future –0.691285 0.149653 0.000789 0.030586 –8.578122 197.4885
Dr. Reddy Equity –0.200758 0.155158 0.000471 0.021906 –0.353164 11.13869
Future –0.196888 0.156963 0.000470 0.021925 –0.514258 12.63000
GAIL Equity –0.249506 0.277720 0.000958 0.027587 –0.133117 16.47757
Future –0.273169 0.303019 0.000955 0.028331 –0.121710 18.93049
Grasim Equity –0.232023 0.154394 0.000951 0.022999 –0.293028 11.63604
Future –0.228179 0.167767 0.000951 0.023548 –0.0261500 11.03452
HCL-Tech Equity –0.200023 0.172195 0.000879 0.030214 –0.081671 7.191669
Future –0.199450 0.176587 0.000879 0.030865 –0.013506 7.472510
Hero Honda Equity –0.104218 0.196555 0.001031 0.022655 0.259356 7.089876
Future –0.092806 0.184592 0.001024 0.021937 0.179150 7.098515
Hindustan Equity –0.163496 0.094060 0.000150 0.020100 –0.156670 6.385060
Unilever Future –0.166734 0.089587 0.000153 0.020100 –0.156670 6.779070
(Table 1 continued)

(Table 1 continued)
Standard
Company Returns Minimum Maximum Mean Deviation Skewness Kurtosis
HPCL Equity –0.295539 0.207431 0.000618 0.028153 –0.119792 12.61669
Future –0.293721 0.204958 0.000610 0.028862 –0.06084 12.20369
ICICI Bank Equity –0.221355 0.207324 0.001068 0.030050 –0.131453 8.233522
Future –0.221967 0.227129 0.001069 0.030145 –0.113474 8.866818
Infosys Equity –0.308508 0.122349 0.000965 0.023795 –0.931822 18.27409
Future –0.298987 0.117445 0.000967 0.023152 –0.900874 18.19393
ITC Equity –0.102619 0.105820 0.000938 0.019847 0.165823 5.602896
Future –0.114133 0.101763 0.000940 0.019564 0.061902 5.680150
Mahindra & Equity –0.669107 0.214999 0.001286 0.030767 –4.478031 107.2733
Mahindra Future –0.678933 0.214999 0.001286 0.030767 –4.828450 110.9290
Maruti Suzuki Equity –0.130989 0.118628 0.001234 0.025452 –0.047560 5.115157
Future –0.125328 0.125742 0.001234 0.025472 –0.099463 5.535647
MTNL Equity –0.182968 0.153025 –0.000323 0.027216 –0.035794 7.477142
Future –0.193301 0.159296 –0.000323 0.027453 –0.076868 8.000121
Natl. Alum. Equity –0.249230 0.156103 0.000825 0.030980 –0.394973 8.844752
Future –0.258132 0.150137 0.000823 0.033357 –0.443772 8.458246
Nifty Equity –0.130539 0.163343 0.000568 0.016933 –0.313754 11.01420
Future –0.162581 0.161947 0.000566 0.017926 –0.471418 11.76723
Oriental Bank Equity –0.294553 0.188365 0.000605 0.030980 –0.511100 10.38555
of Commerce Future –0.312510 0.184779 0.000593 0.031234 –0.632815 11.41507
Punjab Equity –0.197136 0.147241 0.001149 0.028376 –0.202567 6.433134
National Bank Future –0.201285 0.174964 0.001139 0.028946 –0.168671 7.349748
Ranbaxy Equity –0.1997136 0.147241 0.001149 0.028376 –0.202567 6.433134
Future –0.260236 0.190682 0.000466 0.025613 –0.748302 15.17248
Reliance Equity –0.305956 0.209196 0.000800 0.032883 –0.469289 12.80954
Infrastructure Future –0.355064 0.211788 0.000807 0.033817 –0.685393 14.50732
RIL Equity –0.177619 0.193672 0.001052 0.023583 –0.181655 10.11078
Future –0.176983 0.197079 0.001053 0.023740 –0.213628 10.33069
SBI Equity –0.153763 0.182544 0.001257 0.024708 –0.067966 7.235128
Future –0.171122 0.189225 0.001254 0.025546 –0.134437 7.710320
Tata Motors Equity –0.179653 0.172487 0.001140 0.028735 –0.160887 6.958043
Future –0.188008 0.165531 0.001143 0.028827 –0.253831 7.242838
Tata Power Equity –0.227961 0.208831 0.001101 0.026717 –0.232171 10.79250
Future –0.244837 0.197815 0.001101 0.027417 –0.294116 10.96412
Tata Steel Equity –0.163924 0.157035 0.001136 0.030626 –0.340478 6.203144
Future –0.161523 0.152051 0.001135 0.031109 –0.342121 6.085038
TCS Equity –0.113063 0.144065 0.000895 0.023767 0.131838 7.187601
Future –0.723366 –0.699193 0.000897 0.034985 –0.587030 227.5282
Union Bank Equity –0.159859 0.200920 0.001220 0.030399 0.024743 6.546067
Future –0.162473 0.197551 0.001210 0.030311 0.013138 6.528181
Wipro Equity –0.217820 0.213697 0.000628 0.026549 –0.226103 10.48271
Future –0.248185 0.222535 0.000630 0.027218 –0.294975 11.65685
Source: Authors’ findings.

Unit Root Test

In the initial stage of any time series analysis, the properties of the time series must be examined for the
presence of stationarity. In the literature, usually this is accomplished by using the two most widely-used
tests, namely, ADF and PP. The present study also uses these tests and results are reported in
Table 2. Both the tests found that spot price series and futures price series are non-stationary at their
levels but have attained stationarity after taking the first difference. Taking cue from the results, the
analysis will therefore proceed further under the assumption that all the price series are integrated of the
order one.
Table 2. Unit Root Test
Closing Price First Difference

With With
Without With Intercept and Without With Intercept
Company Intercept Intercept Trend Intercept Intercept and Trend
ABB Ltd. Future (DF) –0.090287 –1.953664 –1.899606 –5.385960 –5.481266 –5.559017
Future (PP) 0.035748 –1.786339 –1.678878 –35.45816 –35.39750 –35.33948
Equity(DF) –0.088177 –1.932247 –1.876433 –5.37555 –5.471248 –5.552868
Equity (PP) 0.046944 –1.780263 –1.662378 –34.11724 –34.04429 –33.97465
ACC Ltd. Future (DF) 0.500361 –1.019270 –1.948413 –8.026970 –8.201478 –8.203584
Future (PP) 0.428539 –1.095105 –2.094054 –45.74492 –45.79550 –45.78887
Equity(DF) 0.529286 –0.994470 –1.953889 –7.980634 –8.157304 –8.158240
Equity (PP) 0.459826 –1.068355 –2.087598 –45.28206 –45.32084 –45.31345
Ambuja Future (DF) 0.680431 –0.897838 –1.898334 –8.025710 –8.191546 –8.189271
Cement Future (PP) 0.718072 –0.954789 –1.923175 –48.45835 –48.54857 –48.54302
Equity DF) 0.712172 –0.862569 –1.887994 –7.977727 –8.146745 –8.144339
Equity (PP) 0.757562 –0.919852 –1.904755 –47.79300 –47.87321 –47.86719
Andhra Bank Future (DF) 1.162094 –0.405880 –1.0348085 –7.123899 –7.208847 –7.211825
Future (PP) 1.126217 –0.523990 –1.222204 –37.44988 –37.44529 –37.43570
Equity(DF) 1.140330 –0.447352 –1.075605 –7.037818 –7.121774 –7.124229
Equity (PP) 1.114366 –0.564732 –1.252679 –36.83307 –36.82199 –36.81197
Ashok Future (DF) 1.156856 –0.200276 –0.672076 –6.084204 –6.150504 –6.173764
Leyland Future (PP) 1.154837 –0.493203 –0.963308 –34.11832 –34.09821 –34.08394
Equity(DF) 1.185128 –0.178649 –0.651187 –6.047783 –6.116098 –6.138519
Equity (PP) 1.187663 –0.467264 –0.937680 33.44264 –33.42041 –33.40595
Aurobindo Future (DF) 0.969675 –0.478165 –0.771138 –5.131810 –5.183410 –5.193850
Pharma Future (PP) 1.104196 –0.349707 –0.715015 –33.87394 –33.79969 –33.77635
Equity(DF) 0.921728 –0.530874 –0.820831 –5.099468 –5.150888 –5.160570
Equity (PP) 1.105103 –0.358518 –0.721869 –34.80330 –34.72786 –34.70455
Bank of Future (DF) 2.417446 1.785208 0.202449 –7.046619 –7.172171 –7.234417
Baroda Future (PP) 2.847456 1.997839 0.356682 –38.12667 –38.18744 –38.19254
Equity(DF) 2.415600 1.762704 0.169614 –7.023400 –7.151220 –7.214541
Equity (PP) 2.846715 1.955598 0.319730 –37.47907 –37.52852 –37.53025
(Table 2 continued)

(Table 2 continued)
With With
Bank of India Future (DF) 1.660744 0.347595 –2.390273 –7.561644 –7.790308 –7.786031
Future (PP) 1.633599 0.267433 –2.635108 –37.93006 –38.04328 –38.03103
Equity(DF) 1.659803 0.337610 –2.411693 –7.590378 –7.820947 –7.816196
Equity (PP) 1.629149 0.248926 –2.676987 –38.09241 –38.21289 –38.20027
Bharat Future (DF) 0.545812 –1.387431 –2.073486 –6.570622 –6.837763 –6.991359
Electrical Ltd. Future (PP) 0.653236 –1.272106 –1.993411 –42.65770 –42.68666 –42.70313
Equity(DF) 0.534510 –1.395542 –2.092399 –6.519044 –6.788554 –6.944116
Equity (PP) 0.665318 –1.266345 –1.969085 –41.38176 –41.36133 –41.35453
Bharat Forge Future (DF) –0.100034 –1.598258 –1.558813 –5.164718 –5.166983 –5.188571
Future (PP) –0.008288 –1.618167 –1.657172 –35.73020 –35.71588 –35.69645
Equity(DF) –0.134025 –1.636516 –1.596478 –5.069819 –5.071212 –5.095538
Equity (PP) –0.006025 –1.582442 –1.610798 –35.52214 –35.50790 –35.48738
BHEL Future (DF) 1.074785 –0.304962 –2.697255 –7.580162 –8.232730 –8.330404
Future (PP) 1.028844 –0.361114 –3.370272 –46.01202 –47.02035 –47.13479
Equity(DF) 1.125949 –0.261007 –2.678540 –7.375061 –8.062398 –8.169158
Equity (PP) 1.223802 –0.199437 –2.691061 –43.88831 –44.23638 –44.27883
BPCL Future (DF) 1.080725 –0.658929 –1.701256 –8.108687 –8.184796 –8.186256
Future (PP) 0.979669 –1.098716 –2.162262 –44.78814 –44.82258 –44.81138
Equity(DF) 1.057271 –0.706827 –1.747777 –7.995904 –8.071095 –8.072389
Equity (PP) 0.974148 –1.116040 –2.175981 –45.53729 –45.57213 –45.56094
Canara Bank Future (DF) 1.743050 0.892677 –0.456157 –7.050761 –7.168128 –7.199323
Future (PP) 2.047807 1.075767 –0.314794 –38.09076 –38.14841 –38.14976
Equity(DF) 1.700421 0.829576 –0.528030 –7.083912 –7.201757 –7.231767
Equity (PP) 2.045787 1.046336 –0.336159 –38.61444 –38.67402 –38.67448
Cipla Future (DF) 1.190534 –0.319899 –2.433431 –7.888710 –8.025249 –8.037182
Future (PP) 1.145060 –0.417309 –2.568668 –45.55932 –45.64317 –45.63779
Equity(DF) 1.171944 –0.343222 –2.437605 –7.847737 –7.985329 –7.996737
Equity (PP) 1.139595 –0.429567 –2.562311 –46.07275 –46.16420 –46.15877
Dabur Future (DF) –0.277075 –2.055578 –2.271136 –5.721108 –5.816757 –6.017795
Future (PP) –0.146524 –2.081342 2.569926 –38.59577 –38.73138 –39.04506
Equity(DF) –0.267040 –2.052818 –2.226790 –5.422832 –5.502092 –5.712790
Equity (PP) –0.148726 –2.084982 –2.563393 –39.16174 –39.30372 –39.64027
Dr. Reddy Future (DF) 1.642870 0.814474 –0.547509 –7.463154 –7.533673 –7.624992
Future (PP) 1.702517 0.951814 –0.606453 –47.88345 –47.87241 –47.87665
Equity(DF) 1.653910 0.818475 –0.540193 –7.408991 –7.481371 –7.570321
Equity (PP) 1.719084 0.971984 –0.594516 –47.25044 –47.24104 –47.24801
GAIL Future (DF) 2.092461 0.540013 –1.300721 –7.832375 –8.056056 –8.060116
Future (PP) 1.887163 0.150544 –1.825876 –44.72565 –45.04335 –45.03091
Equity(DF) 2.140199 0.550273 –1.275874 –7.892882 –8.127365 –8.130196
Equity (PP) 1.902086 0.131234 –1.829224 –43.89889 –44.21498 –44.20107
(Table 2 continued)

(Table 2 continued)
With With
Grsaim Future (DF) –0.125627 –1.652749 –2.246855 –7.239689 –7.385266 –7.465423
Future (PP) –0.116744 –1.617117 –2.159349 –46.63502 –46.52253 –46.45617
Equity(DF) –0.135536 –1.662068 –2.261573 –7.150066 –7.295977 –7.377896
Equity (PP) –0.107770 –1.609114 –2.131264 –46.33531 –46.21222 –46.13878
HCL-Tech Future (DF) 1.019958 –0.937723 –1.558891 –6.955006 –7.090198 –7.099287
Future (PP) 0.996947 –0.954527 –1.692676 –45.07208 –45.17678 –45.16953
Equity(DF) 1.017044 –0.948045 –1.554876 –7.031364 –7.169677 –7.179751
Equity (PP) 0.996052 –0.965020 –1.681039 –43.90071 –43.99384 –43.98685
Hero Honda Future (DF) 1.987731 0.121790 –1.202598 –7.069447 –7.587805 –7.627108
Future (PP) 2.025273 0.184141 –1.365741 –43.50033 –43.95105 –43.94688
Equity(DF) 2.145658 0.249824 –1.108058 –7.152773 –7.705884 –7.745447
Equity (PP) 2.106961 0.257109 –1.331784 –44.10447 –44.70407 –44.70144
Hindustan Future (DF) 0.181358 –1.359326 –2.917013 –8.079262 –8.085959 –8.159842
Unilever Future (PP) 0.176570 –1.504382 –2.932744 –46.73446 –46.72980 –46.76331
Equity(DF) 0.196364 –1.317072 –2.871126 –8.375194 –8.381751 –8.456383
Equity (PP) 0.170141 –1.516767 –2.956652 –46.50642 –46.50230 –46.54059
HPCL Future (DF) 0.481935 –2.525349 –2.553389 –8.292197 –8.352120 –8.354324
Future (PP) 0.346821 –2.720064 –2.777399 –44.42878 –44.43935 –44.43096
Equity(DF) 0.486855 –2.568859 –2.595043 –8.245827 –8.307886 –8.311073
Equity (PP) 0.353231 –2.718751 –2.774624 –44.16678 –44.17294 –44.16456
ICICI Bank Future (DF) 0.473390 –1.315569 –2.124761 –6.623504 –6.800144 –6.841151
Future (PP) 0.549511 –1.199543 –2.082629 –39.80895 –39.83793 –39.83373
Equity(DF) 0.473132 –1.321292 –2.114992 –6.607856 –6.784858 –6.827540
Equity (PP) 0.545762 –1.209152 –2.079332 –39.10717 –39.13591 –39.13201
Infosys Future (DF) 2.189722 0.590315 –1.348779 –8.161649 –8.378297 –8.382681
Future (PP) 2.154546 0.334784 –1.491372 –45.55838 –45.69899 –45.68775
Equity(DF) 2.194429 0.579885 –1.348627 –8.129878 –8.349456 –8.353306
Equity (PP) 2.138248 0.315103 –1.524621 –45.82203 –45.99974 –45.98787
ITC Future (DF) 2.80947 1.232725 –1.369553 –7.966240 –8.430803 –8.438265
Future (PP) 2.743204 1.021821 –1.857661 –48.97512 –49.54438 –49.54053
Equity(DF) 2.908252 1.291235 –1.301767 –8.049705 –8.533759 –8.540576
Equity (PP) 2.778058 1.020008 –1.887851 –49.16922 –49.83209 –49.82805
Mahindra & Future (DF) –0.135243 –1.1511137 –2.369793 –7.280642 –7.469005 –7.553156
Mahindra Future (PP) –0.167237 –1.535560 –2.469065 –42.97594 –42.94896 –42.83607
Equity(DF) –0.117213 –1.497281 –2.370546 –7.277885 –7.469728 –7.552120
Equity (PP) –0.148134 –1.520143 –2.471346 –42.88132 –42.85919 –42.84871
(Table 2 continued)

(Table 2 continued)
With With
Maruti Suzuki Future (DF) 1.113567 –0.782569 –1.914928 –7.104147 –7.312302 –7.322288
Future (PP) 1.060463 –0.914897 –2.121985 –40.67637 –40.70036 –40.70463
Equity(DF) 1.132994 –0.785072 –1.893698 –7.124952 –7.339813 –7.356601
Equity (PP) 1.058605 –0.932180 –2.130305 –40.45843 –40.48979 –40.49731
MTNL Future (DF) –0.881949 –1.897438 –2.403263 –8.494455 8.513379 –8.539237
Future (PP) –0.995211 –2.2997744 –2.764365 –44.12948 –44.12992 –44.12874
Equity(DF) –0.876350 –1.880548 –2.391884 –8.472889 –8.491067 –8.520465
Equity (PP) –0.989963 –2.261586 –2.727976 –44.27621 –44.27706 –44.27682
Natl. Alum. Future (DF) 0.434785 –1.490943 –2.618638 –8.051350 –8.165399 –8.192424
Future (PP) 0.142189 –1.742737 –3.226699 –40.41878 –40.43956 –40.43129
Equity(DF) 0.422714 –1.497518 –2.582557 –7.978953 –8.098610 –8.130734
Equity (PP) 0.149079 –1.715313 –3.113692 –39.50583 –39.50849 –39.49876
Nifty Future (DF) 1.370887 0.022903 –2.327517 –8.379170 –8.533708 –8.566975
Future (PP) 1.321666 0.013263 –2.445352 –49.77403 –49.76677 –49.76006
Equity(DF) 1.400311 0.036995 –2.290709 –8.438711 –8.601913 –8.633374
Equity (PP) 1.350615 0.030470 –2.403034 –47.05096 –47.01895 –47.00297
Oriental Future (DF) 0.792872 –0.367221 –0.156065 –7.353844 –7.379130 –7.450670
Bank of Future (PP) 0.942631 –0.590049 –0.518407 –37.30879 –37.30896 –37.30698
Commerce Equity(DF) 0.812941 –0.329546 –0.119342 –7.308975 –7.334917 –7.405814
Equity (PP) 0.969855 –0.573021 –0.503968 –36.94576 –36.94553 –36.94264
Punjab Future (DF) 2.072565 0.881164 –0.678295 –7.374198 –7.570448 –7.569050
National Future (PP) 2.325355 0.927007 –0.677813 –39.90518 –39.94939 –39.93739
Bank Equity(DF) 2.066173 0.852076 –0.697958 –7.336827 –7.533272 –7.531551
Equity (PP) 2.303653 0.876396 –0.705437 –39.19591 –39.21928 –39.20753
Ranbaxy Future (DF) 0.261967 –2.170131 –2.174782 –7.401821 –7.437967 –7.437478
Future (PP) 0.176555 –2.289497 –2.306461 –45.38225 –45.37058 –45.36022
Equity(DF) 0.264500 –2.163535 –2.166820 –7.387945 –7.422643 –7.422317
Equity (PP) 0.149866 –2.322359 –2.337980 –44.98358 –46.37690 –44.95471
Reliance Future (DF) –0.502559 –1.991679 –2.804099 –7.66882 –7.728583 –7.736919
Infra- Future (PP) –0.593687 –2.0299024 –2.949160 –46.39131 –46.37690 –46.36576
structure Equity(DF) –0.513381 –2.007429 –2.828204 –7.541632 –7.604315 –7.613938
Equity (PP) –0.585716 –2.087705 –2.935189 –45.63565 –45.61560 –45.60367
RIL Future (DF) 0.212457 –1.024126 –2.407898 –7.460373 –7.693023 –7.695367
Future (PP) 0.297643 –0.976591 –2.280026 –45.44595 –45.50309 –45.49825
Equity(DF) 0.209950 –1.025797 –2.414207 –7.383819 –7.618673 –7.620922
Equity (PP) 0.306858 –0.970974 –2.261715 –44.84421 –44.90792 –44.90329
(Table 2 continued)

(Table 2 continued)
With With
SBI Future (DF) 1.427136 0.198057 –2.240499 –7.375600 –7.696335 –7.695558
Future (PP) 1.922185 0.599215 –1.720031 –45.24475 –45.28462 –45.27418
Equity(DF) 1.446591 0.220606 –2.223605 –7.403284 –7.728695 –7.727553
Equity (PP) 1.945219 0.624898 –1.689222 –44.08824 –44.08608 –44.07583
Tata Motors Future (DF) 0.847248 –0.799883 –1.369566 –7.366759 –7.501164 –7.513191
Future (PP) 0.959982 –0.720249 –1.317615 –43.85329 –43.75976 –43.74209
Equity(DF) 0.847579 –0.795731 –1.378024 –7.318940 –7.452774 –7.463975
Equity (PP) 0.978872 –0.701789 –1.307853 –43.47614 –43.38434 –43.36689
Tata Power Future (DF) 1.013025 –0.434907 –2.540671 –7.853485 –8.105526 –8.110530
Future (PP) 0.820043 –0.576526 –2.938543 –44.07365 –44.85586 –44.84599
Equity(DF) 1.008409 –0.445012 –2.539778 –7.829397 –8.084865 –8.090334
Equity (PP) 0.816808 –0.583860 –2.936797 –44.07365 –44.13083 –44.12106
Tata Steel Future (DF) 0.026275 –1.583860 –2.170858 –6.987423 –7.096745 –7.130332
Future (PP) –0.055337 –1.654040 –2.324082 –45.31019 –45.24094 –45.20660
Equity(DF) 0.008163 –1.598873 –2.206477 –6.973341 –7.084411 –7.119605
Equity (PP) –0.047983 –1.645071 –2.311192 –44.14091 –44.06746 –44.03121
TCS Future (DF) 1.666459 0.217080 –0.501835 –6.045022 –6.190907 –6.202228
Future (PP) 1.732300 –0.316220 –1.227588 –53.62796 –54.24508 –54.24241
Equity(DF) 1.635760 –0.204394 –0.521164 –5.810003 –5.955143 –5.966508
Equity (PP) 1.923310 0.247640 –0.513777 –38.44502 –38.55501 –38.54447
Union Bank Future (DF) 2.327694 1.158717 –0.608783 –7.463397 –7.720539 –7.718644
Future (PP) 2.509742 1.198236 –0.730127 –38.10757 –38.24153 –38.22926
Equity(DF) 2.305430 1.117411 –0.658429 –7.401121 –7.659786 –7.657508
Equity (PP) 2.497742 1.149554 –0.785185 –38.51961 –38.67088 –38.65817
Wipro Future (DF) 0.955181 –0.704435 –1.639217 –6.510530 –6.58952 –6.587204
Future (PP) 1.021427 –0.634134 –1.653045 –46.27021 –46.29061 –46.28212
Equity(DF) 0.948224 –0.722232 –1.638940 –6.524253 –6.601495 –6.601349
Equity (PP) 1.021259 –0.642117 –1.640381 –45.63964 –45.65315 –45.64418
Cointegration Tests
Since most price series are all non-stationary and integrated of the same order, cointegration is the pre-
ferred tool when analyzing the relationship between the price series. One of the ways to investigate the
presence of cointegration is the residual-based approach which indicates that the linear combination (ut)
of non-stationary spot and futures price series of all the individual stocks and index, i.e., residual, is
stationary. Table 3 reports the results of residual-based approach. In case of all the individual securities
and the index, the ADF and PP tests rejected the null hypothesis of presence of unit root in residuals.
Thus, from the results, it appears that two time series have a long-term or equilibrium relationship.

Table 3. Unit Root Tests for Residuals
Augmented Dickey–Fuller Test Phillip–Perron Test

Without With With Intercept Without With With Intercept
Company Intercept Intercept and Trend Intercept Intercept and Trend
ABB Ltd. –10.8541 –10.85005 –11.12888 –22.57384 –22.56890 –22.79011
ACC –12.01763 –12.01481 –12.53140 –20.13409 –20.13084 –20.78958
Ambuja Cement –9.609097 –9.606593 –9.848289 –28.57605 –28.57292 –28.85408
Andhra Bank –12.43829 –12.43478 –12.49591 –16.33966 –16.33546 –16.39189
Ashok Leyland –9.105019 –9.101598 –9.192193 –13.10234 –13.09824 –13.22272
Aurobindo –8.587727 –8.583917 –8.872428 –25.52390 –25.51932 –25.67237
Pharma
Bank of Baroda –8.730633 –8.727464 –8.736962 –20.11071 –20.10741 –20.15576
Bank of India –10.18914 –10.18593 –10.23563 –29.48169 –29.47776 –29.50281
Bharat Elect. –7.881351 –7.879315 –8.080131 –44.27024 –44.25860 –44.34983
Ltd.
Bharat Forge –10.83801 –10.83400 –11.03089 –23.48328 –23.47777 –23.83975
BHEL –14.75782 –14.75447 –14.85401 –19.13681 –19.13111 –19.01025
BPCL –12.14607 –12.14324 –12.14355 –25.41458 –25.41106 –25.41314
Canara Bank –12.11694 –12.11358 –12.15263 –20.48284 –20.47817 –20.50862
Cipla –10.66623 –10.66350 –10.65906 –28.36344 –28.35996 –8.35619
Dabur –12.70301 –12.69826 –12.69805 –34.81685 –34.81033 –34.80226
Dr. Reddy –6.537995 –6.536734 –6.758005 –32.97786 –32.97365 –32.95039
GAIL –9.237581 –9.234835 –9.271971 –18.46532 –18.46179 –18.56327
Grasim –10.38503 –10.38261 –10.44440 –25.69709 –25.69410 –25.78646
HCL-Tech –7.505358 –7.503129 –7.513486 –24.73741 –24.73377 –24.74037
Hero Honda –13.06661 –13.06309 –13.07906 –16.31160 –16.30753 –16.31979
Hindustanlever –14.12265 –14.11938 –14.23652 –21.10987 –21.10641 –21.19413
HPCL –17.15815 –17.15426 –17.19752 –40.89532 –40.88824 –40.85371
ICICI Bank –7.864603 –7.862106 –7.856940 –24.86496 –24.86135 –24.86145
Infosys –10.25204 –10.24959 –10.24507 –28.85691 –28.85347 –28.84953
ITC –11.83246 –11.82936 –11.83584 –20.15910 –20.15566 –20.15711
M&M –6.855449 –6.853414 –7.019868 –44.99647 –44.98981 –44.90147
Maruti Suzuki –10.43135 –10.42790 –10.61140 –28.05981 –28.05605 –28.17693
MTNL –10.80220 –10.79970 –10.84818 –42.86017 –42.85169 –42.84178
Natl. Alum. –5.088063 –5.085197 –5.084618 –14.66584 –14.66209 –14.70060
OBC –11.85750 –11.85428 –11.85477 –19.43946 –19.43469 –19.43973
PNB –8.433394 –8.430460 –8.445871 –16.56435 –16.56075 –16.56907
Ranbaxy –7.893552 –7.891654 –7.910094 –15.43864 –15.43536 –15.44885
Reliance Infra –6.562827 –6.561382 –6.648696 –47.82079 –47.81504 –47.64302
RIL –5.345520 –5.344058 –5.385138 –31.98473 –31.98148 –31.72683
SBI –5.258455 –5.256840 –5.342850 –23.76729 –23.76408 –23.87098
Tata Motors –7.687604 –7.685852 –8.163811 –25.19257 –25.18956 –25.90094
Tata Power –6.937007 –6.934518 –6.942871 –29.35920 –29.35602 –29.37283
Tata Steel –7.648123 –7.646200 –7.958455 –24.26751 –24.26403 –24.50750
TCS –6.672058 –6.669608 –6.685200 –38.17787 –38.16578 –38.24704
Union Bank –6.089835 –6.083845 –6.066496 –19.07820 –19.07486 –19.07737
Wipro –5.698289 –5.695817 –5.718234 –24.91318 –24.91006 –24.93324
Nifty –9.954291 –9.952258 –9.966937 –27.96531 –27.95941 –27.75361

Granger Causality Test

The information inputs regarding the Granger Causality test, i.e., the cause and effect relationship
between the two return series are reported in Table 4. The results exhibit that out of 41 sample stocks,
9 stocks show a bilateral (feedback) relationship, 19 stocks exhibit a unilateral relationship and 13 stocks
show no causality. As far as the index is concerned, it also shows a bilateral causality between the spot
and the futures return series. Overall results indicate that 68 per cent of the sample stocks and Nifty
exhibit causality between their spot and futures return trends. It is worthwhile to mention here that
Granger Causality depends critically on the number of lagged terms introduced in the model (Gujarati,
2007). Due to this reason, results derived from the Granger Causality may not be authentic. It is also
pertinent to mention here that number of lags chosen for the Granger Causality test are based on AIC
(Akaike information criterion) and SIC (Schwarz information criteria).
Table 4. Granger Causality Test

Independent F-Value
Symbol Dependent Future Equity
ABB Ltd. Future 2.15281 (0.0286)
Equity 0.85187 (0.5569)
ACC Future 0.15256 (0.6961)
Equity 6.17106 (0.0131)
Ambuja Cement Future 2.07275 (0.0352)
Equity 1.43767 (0.1756)
Andhra Bank* Future 3.74468 (0.000050)
Equity 1.90907 (0.0399)
Ashok Leyland** Future 1.32061 (0.2526)
Equity 0.07802 (0.9956)
Aurobindo Pharma Future 1.40727 (0.1418)
Equity 4.42003 (0.00000)
Bank of Baroda** Future 1.43781 (0.1964)
Equity 0.73740 (0.6195)
Bank of India Future 1.94814 (0.0254)
Equity 1.49746 (0.1176)
Bharat Electrical Ltd. Future 92.4853 (0.0000000)
Equity 1.73237 (0.0768)
Bharat Forge** Future 0.65376 (0.7679)
Equity 1.52245 (0.1255)
BHEL* Future 7.78847 (0.0000000)
Equity 46.8762 (0.000000)
BPCL Future 1.62539 (0.0599)
Equity 3.79753 (0.000001)
Canara Bank Future 1.17166 (0.3125)
Equity 2.18967 (0.0257)
Cipla Future 1.61243 (0.0888)
Equity 2.63477 (0.0024)
Dabur Future 24.6787 (0.000000)
Equity 0.63236 (0.8283)
(Table 4 continued)

(Table 4 continued)
Independent F-Value
Dr. Reddy** Future 1.58661 (0.0754)
Equity 1.50303 (0.1017)
GAIL** Future 1.59610 (0.0936)
Equity 0.85929 (0.5803)
Grasim** Future 1.74012 (0.1078)
Equity 1.43632 (0.1968)
HCL-Tech Future 5.96317 (0.000000)
Equity 1.43300 (0.1876)
Hero Honda** Future 1.27050 (0.2794)
Equity 1.53696 (0.1889)
Hindustan Unilever** Future 1.37600 (0.2302)
Equity 0.59365 (0.7049)
HPCL Future 1.23535 (0.2322)
Equity 135.676 (0.00000)
ICICI Bank** Future 1.29040 (0.2235)
Equity 1.17594 (0.2985)
Infosys Future 2.60970 (0.0110)
Equity 2.00353 (0.0513)
ITC Future 1.19398 (0.2645)
Equity 2.04090 (0.0086)
Mahindra & Mahindra* Future 2.43653 (0.0028)
Equity 1.88856 (0.0272)
Maruti Suzuki* Future 2.23318 (0.0068)
Equity 1.88856 (0.0272)
MTNL Future 1.47373 (0.1193)
Equity 213.624 (0.0000)
Natl. Alum.* Future 1.66515 (0.0426)
Equity 1.78479 (0.0248)
Nifty* Future 1.71230 (0.0343)
Equity 75.9942 (0.000000)
Oriental Bank of Future 1.65031 (0.1296)
Commerce** Equity 1.56756 (0.1528)
Punjab National Bank** Future 2.08371 (0.0805)
Equity 0.85595 (0.4898)
Ranbaxy* Future 1.88956 (0.0131)
Equity 2.46864 (0.0005)
Reliance Infrastructure* Future 1.87638 (0.0161)
Equity 46.0871 (0.000000)
RIL** Future 1.23997 (0.2437)
Equity 1.16017 (0.3031)
SBI Future 2.43977 (0.0093)
Equity 1.22130 (0.2770)
Tata Motors* Future 1.83883 (0.0494)
Equity 3.66096 (0.000007)
Tata Power Future 1.44986 (0.1098)
Equity 2.43799 (0.0012)
(Table 4 continued)

(Table 4 continued)
Independent F-Value
Tata Steel** Future 1.39025 (0.1704)
Equity 1.61370 (0.0884)
TCS Future 41.3962 (0.000000)
Equity 0.27966 (0.9728)
Union Bank* Future 1.95505 (0.0095)
Equity 2.31448 (0.0014)
Wipro Future 2.34150 (0.0056)
Equity 1.34050 (0.1885)
Notes: * testifies that securities have bilateral causality; ** testifies that securities that have no causality; values in parentheses
are P-values.
Johansen’s Cointegration Test

In addition to the residual-based approach and Granger Causality test, another technique to test the
cointegration between the spot and futures price series is the Johansen’s cointegration test. Johansen’s
cointegration test has two parts, namely, λmax and λTrace to determine the rank of the coefficient ∏ matrix.
The results of above-mentioned two variables are reported in Table 5. The maximum eigenvalue and
trace test suggest that all the stocks show one cointegration relationship. The conclusion must therefore
be that spot prices and futures prices are cointegrated and hence there is a long-run relationship between
the price series. In other words, spot and futures prices share common long-run information. The results
are consistent with the results of Gupta and Singh (2006) and Pradhan and Bhat (2009).
Table 5. Johansen’s Cointegration Test
Test Statistics Critical Value (5 per cent) Critical Value (1 per cent)
Symbol Vector λTrace λMax λTrace λMax λTrace λMax
ABB Ltd. 0 68.49047 63.23130 25.32 18.96 30.45 23.65
1 5.259169 5.259169 12.25 12.25 16.26 16.26
ACC 0 100.1005 97.61513 25.32 18.96 30.45 23.65
1 2.485344 2.485344 12.25 12.25 16.26 16.26
Ambuja Cement 0 177.0142 174.1686 25.32 18.96 30.45 23.65
1 2.845569 2.845569 12.25 12.25 16.26 16.26
Andhra Bank 0 130.1891 125.9417 25.32 18.96 30.45 23.65
1 4.247433 4.247433 12.25 12.25 16.26 16.26
Ashok Leyland 0 91.39943 89.18385 25.32 18.96 30.45 23.65
1 2.215580 2.215580 12.25 12.25 16.26 16.26
Aurobindo 0 95.41046 94.32350 25.32 18.96 30.45 23.65
Pharma 1 1.086960 1.086960 12.25 12.25 16.26 16.26
(Table 5 continued)

(Table 5 continued)
Bank of Baroda 0 76.47623 72.31775 25.32 18.96 30.45 23.65
1 4.158479 4.158479 12.25 12.25 16.26 16.26
Bank of India 0 180.1575 168.3560 25.32 18.96 30.45 23.65
1 11.80148 11.80148 12.25 12.25 16.26 16.26
Bharat Electrical 0 393.3710 386.2318 25.32 18.96 30.45 23.65
Ltd. 1 7.139207 7.139207 12.25 12.25 16.26 16.26
Bharat Forge 0 70.44186 68.86425 25.32 18.96 30.45 23.65
1 1.577612 1.577612 12.25 12.25 16.26 16.26
BHEL 0 240.5808 238.1363 25.32 18.96 30.45 23.65
1 2.444487 2.444487 12.25 12.25 16.26 16.26
BPCL 0 127.7456 118.5377 25.32 18.96 30.45 23.65
1 9.207942 9.207942 12.25 12.25 16.26 16.26
Canara Bank 0 132.2315 126.3997 25.32 18.96 30.45 23.65
1 5.831830 5.831830 12.25 12.25 16.26 16.26
Cipla 0 244.9117 238.7754 25.32 18.96 30.45 23.65
1 6.136285 6.136285 12.25 12.25 16.26 16.26
Dabur 0 80.42863 72.54632 25.32 18.96 30.45 23.65
1 7.882304 7.882304 12.25 12.25 16.26 16.26
Dr. Reddy 0 98.24592 94.57888 25.32 18.96 30.45 23.65
1 3.667043 3.667043 12.25 12.25 16.26 16.26
GAIL 0 113.9368 103.4763 25.32 18.96 30.45 23.65
1 10.46052 10.46052 12.25 12.25 16.26 16.26
Grasim 0 94.52828 90.87928 25.32 18.96 30.45 23.65
1 3.649004 3.649004 12.25 12.25 16.26 16.26
HCL-Tech 0 211.8822 207.9261 25.32 18.96 30.45 23.65
1 3.956132 3.956132 12.25 12.25 16.26 16.26
Hero Honda 0 116.2496 112.1139 25.32 18.96 30.45 23.65
1 4.135705 4.135705 12.25 12.25 16.26 16.26
Hindustan 0 153.3732 144.5263 25.32 18.96 30.45 23.65
Unilever 1 8.846876 8.846876 12.25 12.25 16.26 16.26
HPCL 0 260.7303 248.8849 25.32 18.96 30.45 23.65
1 11.84538 11.84538 12.25 12.25 16.26 16.26
ICICI Bank 0 65.22920 61.04705 25.32 18.96 30.45 23.65
1 4.182151 4.182151 12.25 12.25 16.26 16.26
Infosys 0 231.3401 226.0562 25.32 18.96 30.45 23.65
1 5.283865 5.283865 12.25 12.25 16.26 16.26
ITC 0 180.1409 174.2567 25.32 18.96 30.45 23.65
1 5.884179 5.884179 12.25 12.25 16.26 16.26
Mahindra & 0 203.3726 200.0729 25.32 18.96 30.45 23.65
Mahindra 1 3.299695 3.299695 12.25 12.25 16.26 16.26
Maruti Suzuki 0 71.12104 61.72328 25.32 18.96 30.45 23.65
1 9.397763 9.397763 12.25 12.25 16.26 16.26
MTNL 0 315.0849 308.6507 25.32 18.96 30.45 23.65
1 6.434205 6.434205 12.25 12.25 16.26 16.26
Natl. Alum. 0 125.6916 115.6622 25.32 18.96 30.45 23.65
1 10.02946 10.02946 12.25 12.25 16.26 16.26
(Table 5 continued)

(Table 5 continued)
Nifty 0 181.5068 173.5230 25.32 18.96 30.45 23.65
1 7.983820 7.983820 12.25 12.25 16.26 16.26
Oriental Bank of 0 126.4139 122.9907 25.32 18.96 30.45 23.65
Commerce 1 3.423156 3.423156 12.25 12.25 16.26 16.26
Punjab National 0 126.7250 117.7310 25.32 18.96 30.45 23.65
Bank 1 8.993928 8.993928 12.25 12.25 16.26 16.26
Ranbaxy 0 136.8339 130.2271 25.32 18.96 30.45 23.65
1 6.606780 6.606780 12.25 12.25 16.26 16.26
Reliance 0 89.42313 83.74394 25.32 18.96 30.45 23.65
Infrastructure 1 5.679187 5.679187 12.25 12.25 16.26 16.26
RIL 0 189.1804 186.2122 25.32 18.96 30.45 23.65
1 2.968111 2.968111 12.25 12.25 16.26 16.26
SBI 0 117.5120 110.276 25.32 18.96 30.45 23.65
1 7.284427 7.284427 12.25 12.25 16.26 16.26
Tata Motors 0 134.2499 131.0467 25.32 18.96 30.45 23.65
1 3.203212 3.203212 12.25 12.25 16.26 16.26
Tata Power 0 120.9624 115.1032 25.32 18.96 30.45 23.65
1 5.859172 5.859172 12.25 12.25 16.26 16.26
Tata Steel 0 102.8688 97.93827 25.32 18.96 30.45 23.65
1 4.930539 4.930539 12.25 12.25 16.26 16.26
TCS 0 590.4411 588.3981 25.32 18.96 30.45 23.65
1 2.047983 2.047983 12.25 12.25 16.26 16.26
Union Bank 0 111.6354 102.6648 25.32 18.96 30.45 23.65
1 8.970611 8.970611 12.25 12.25 16.26 16.26
Wipro 0 134.2668 131.0792 25.32 18.96 30.45 23.65
1 3.187602 3.187602 12.25 12.25 16.26 16.26
Error Correction Model

Since cointegration is found between the spot and futures price series, the next step is to run the VECM,
which is an appropriate model to determine the direction of causality and lead–lag relationship between
the spot and futures price series. The results of VECM are presented in Tables 6a–6n. The results are
based on VECM with one lag for HCL-Tech, Infosys, TCS, Ashok Leyland, Cipla, ITC and Punjab
National Bank; two lags for Ambuja Cement, Bank of India, RIL, Hindustan Unilever, Wipro, Natl.
Alum., GAIL; three lags for Andhra Bank, Union Bank, Tata Motors and Canara Bank; four lags for
MTNL, Tata Power and Hero Honda; five lags for HPCL, Oriental Bank of Commerce, Mahindra &
Mahindra, Aurobindo Pharma, BPCL and Bharat Forge; six lags for ACC, Bank of Baroda and BHEL;
seven lags for Grasim, ABB and Dabur; eight lags for ICICI Bank, Dr. Reddy and SBI; nine lags for
Maruti Suzuki, Tata Steel and Nifty; ten lags for Ranbaxy; thirteen lags for Reliance Infra. The numbers
of lags are chosen on the basis of AIC and SIC criteria.

Table 6a. Vector Error Correction Model
Company HCL-Tech Infosys Punjab National Bank
Variables ∆Ft ∆St ∆Ft ∆St ∆Ft ∆St

0.000855 0.000857 0.000935*** 0.000926*** 0.001095 0.001090
C
[1.22016] [1.23951] [1.90139] [1.82985] [1.59012] [1.61566]
–0.193367** 0.084963 –0.064689 0.199048*** –0.143577*** 0.018778
Et-1
[–2.08483] [0.92866] [–0.60399] [1.80699] [–1.80523] [0.24088]
–0.456196* –0.248887** –0.235710*** 0.045240 –0.023564 0.165864
∆Ft-1
[–4.12311] [–2.28043] [–1.82775] [0.34108] [–0.18721] [1.34446]
0.454443* 0.245914** 0.261968** –0.009646 0.079040 –0.099913
∆St-1
[4.03486] [2.21347] [2.06729] [–0.07401] [0.61753] [–0.79643]
F-Statistics 11.54931 1.736317 2.986494 2.053160 2.984387 3.337664
Table 6b. Vector Error Correction Model
Company HPCL Mahindra & Mahindra Bharat Electrical Ltd.

0.000557 0.000487 0.001174*** 0.00104*** 0.001087** 0.001185**
C
[0.90518] [1.15386] [1.79344] [1.89565] [2.23494] [2.10509]
–0.016479 0.54093* –0.1623** 0.395783* –0.852674* –0.048791
Et-1
[–0.26310] [12.5831] [–2.33573] [6.79238] [–13.0063] [–0.64334]
0.067025 0.338126* 0.21317* 0.496581* –0.013972 0.110759***
∆Ft-1
[1.07388] [7.89335] [3.09789] [8.60563] [–0.24256] [1.66224]
0.008244 0.182255* 0.00118 0.2952* –0.006497 –0.026101
∆Ft-2
[0.13904] [4.47843] [0.01782] [5.31497] [–0.13330] [–0.46294]
0.000258 0.076373** 0.03422 0.176305* –0.032768 –0.027657
∆Ft-3
[0.00467] [2.01999] [0.55476] [3.40835] [–1.01005] [–0.73693]
–0.078649 0.016737 0.054974 0.12244** – –
∆Ft-4
[–1.61623] [0.50113] [1.03809] [2.75710]
–0.032882 –0.008351 0.062007 0.067863*** – –
∆Ft-5
[–0.85498] [–0.31637] [1.48841] [1.94252]
–0.009966 –0.23176* –0.10363 –0.349815* 0.122644** –0.035874
∆St-1
[–0.16255] [–5.50767] [–1.49976] [–6.03741] [1.99927] [–0.50552]
0.029214 –0.123989* 0.025514 –0.247788* –0.016252 –0.022413
∆St-2
[0.50910] [–3.14820] [0.38953] [–4.51129] [–0.30715] [–0.36617]
0.027102 –0.050678 –0.0667 –0.189324* 0.01898 –0.011232
∆St-3
[0.51951] [–1.41539] [–1.10593] [–3.74350] [0.47896] [–0.24502]
0.050699 –0.029426 –0.07873 –0.126045* – –
∆St-4
[1.16086] [–0.98172] [–1.56498] [–2.98764]
–0.018028 –0.017075 –0.06661*** –0.059671** – –
∆St-5
[–0.65759] [–0.90753] [–1.88826] [–2.01731]
F-Statistics 1.532387 206.4581 3.763429 87.91606 131.6752 2.915844

Table 6c. Vector Error Correction Model
Company Grasim Bank of Baroda Oriental Bank of Commerce

0.000778 0.000789 0.001153 0.001184 0.000574 0.000590
C
[1.55155] [1.60931] [1.53975] [1.63088] [0.77637] [0.80619]
–0.196801*** –0.023226 –0.1975*** –0.024647 –0.007459 0.227861***
Et-1
[–1.89955] [–0.22930] [–1.76199] [–0.22691] [–0.05918] [1.82648]
–0.043127 0.234614*** –0.105109 0.19737 –0.130102 0.110143
∆Ft-1
[–0.30034] [1.67122] [–0.67968] [1.31705] [–0.79342] [0.67863]
–0.078496 0.069775 –0.186108 –0.051382 –0.076378 –0.038279
∆Ft-2
[–0.53653] [0.48781] [–1.18807] [–0.33849] [–0.46363] [–0.23476]
–0.073269 0.014977 –0.012828 0.077696 –0.127923 –0.142805
∆Ft-3
[–0.50374] [0.10532] [–0.08270] [0.51687] [–0.79217] [–0.89344]
–0.020416 0.025448 0.100137 0.143784 –0.185513 –0.204066
∆Ft-4
[–0.14241] [0.18156] [0.66144] [0.98008] [–1.18413] [–1.31600]
–0.126745 –0.102051 0.002525 0.077627 –0.252048*** –0.271712***
∆Ft-5
[–0.90599] [–0.74613] [0.01729] [0.54857] [–1.77728] [–1.93570]
–0.255614*** –0.259755** 0.023412 0.05866
∆Ft-6
[–1.90419] [–1.97922] [0.17708] [0.45786] – –
–0.04889 –0.074901
∆Ft-7
[–0.40011] [–0.62698] – – – –
0.079957 –0.197367 0.217072 –0.08969 0.257563 0.021382
∆St-1
[0.54793] [–1.38339] [1.37123] [–0.58467] [1.56265] [0.13107]
0.055653 –0.090172 0.112837 –0.014963 0.004422 –0.041092
∆St-2
[0.37434] [–0.62038] [0.70429] [–0.09638] [0.02672] [–0.25084]
0.133848 0.0395 –0.009112 –0.113848 0.179591 0.180692
∆St-3
[0.90592] [0.27345] [–0.05748] [–0.74109] [1.10572] [1.12397]
0.069136 0.019164 –0.106236 –0.157784 0.174588 0.189144
∆St-4
[0.47460] [0.13456] [–0.68538] [–1.05046] [1.10885] [1.21368]
0.182991 0.162642 –0.036642 –0.117159 0.225477 0.247180***
∆St-5
[1.28615] [1.16923] [–0.24461] [–0.80710] [1.58320] [1.75349]
0.271087** 0.267121** –0.077244 –0.110893
∆St-6
[1.98446] [2.00008] [–0.56976] [–0.84409] – –
0.050182 0.079991
∆St-7
[0.40361] [0.65807] – – – –
F-Statistics 2.435278 2.225879 3.647425 3.399561 3.799920 4.494630

Table 6d. Vector Error Correction Model
Company Ambuja Cement Bank of India RIL

0.000923*** 0.000922*** 0.001175 0.001193 0.001019** 0.001001**
C
[1.81817] [1.84256] [1.45198] [1.47466] [2.01878] [1.99611]
–0.205360** 0.039495 –0.299429*** –0.004441 –0.247339** –0.034716
Et–1
[–2.31568] [0.45187] [–1.83904] [–0.02727] [–2.01031] [–0.28416]
–0.074031 0.204621*** –0.016115 0.246116 0.082835 0.316880***
∆Ft–1
[–0.65241] [1.82961] [–0.08376] [1.27896] [0.50025] [1.92723]
0.121292 0.203839** –0.116806 –0.027079
∆Ft–2
[1.16925] [1.99373] [–0.67647] [–0.15679] – –
0.046786 –0.225199** 0.114502 –0.148586 –0.050150 –0.271283
∆St–1
[0.40787] [–1.99194] [0.59254] [–0.76875] [–0.30090] [–1.63922]
–0.158675 –0.240496** 0.100944 0.004548
∆St–2
[–1.51482] [–2.32952] [0.58226] [0.02622] – –
F-Statistics 3.121310 2.494889 4.847453 3.755651 2.187522 2.793714
Table 6e. Vector Error Correction Model
Company MTNL Tata Power Natl. Alum.

–0.000297 –0.000263 0.001121*** 0.001125** 0.000713 0.000718
C
[–0.51034] [–0.69487] [1.92289] [1.98772] [0.93936] [1.02061]
–0.129256*** 0.590645* 0.040682 0.211663* –0.196219* –0.039951
Et–1
[–1.89022] [13.2684] [0.51005] [2.73290] [–4.67683] [–1.02726]
0.203583* 0.345073* –0.127818 0.122882 0.15616** 0.304853*
∆Ft–1
[3.06208] [7.97291] [–1.11332] [1.10226] [2.24953] [4.73759]
0.058357 0.21823* –0.23661** –0.166717 0.050623 0.073285
∆Ft–2
[0.95797] [5.50305] [–2.06995] [–1.50202] [0.75186] [1.17421]
–0.019209 0.095267* –0.234565** –0.12996 – –
∆Ft–3
[–0.36358] [2.76997] [–2.09927] [–1.19780]
0.024765 0.030241 –0.153741 –0.112633 – –
∆Ft–4
[0.60821] [1.14089] [–1.48922] [–1.12357]
–0.15429** –0.252294* 0.184478 –0.059081 –0.078973 –0.213875*
∆St–1
[–2.39203] [–6.00852] [1.58166] [–0.52166] [–1.05890] [–3.09371]
–0.009026 –0.13719* 0.151984 0.082481 –0.029606 –0.070364
∆St–2
[–0.15751] [–3.67765] [1.30983] [0.73204] [–0.41483] [–1.06361]
0.030788 –0.065803** 0.231107** 0.115616 – –
∆St–3
[0.66920] [–2.19706] [2.03422] [1.04802]
–0.02933 –0.019865 0.15858 0.11974 – –
∆St–4
[–1.09214] [–1.13625] [1.51411] [1.17738]
F–Statistics 3.602682 330.3603 3.117482 4.937056 6.673068 8.083863

Table 6f. Vector Error Correction Model
Company Andhra Bank Wipro Union Bank

0.000682 0.000692 0.000656 0.000658 0.001181 0.001206***
C
[0.99411] [1.02761] [1.05563] [1.08207] [1.63958] [1.67036]
–0.032651 0.168549*** –0.210321** 0.001144 –0.178296*** 0.012918
Et–1
[–0.33464] [1.75897] [–1.96494] [0.01091] [–1.65300] [0.11948]
–0.490555* –0.292481** –0.282132*** 0.000373 0.123633 0.370054**
∆Ft–1
[–3.48299] [–2.11451] [–1.94895] [0.00263] [0.81366] [2.42966]
–0.364521* –0.330296** –0.270810** –0.162595 –0.096575 0.037855
∆Ft–2
[–2.60389] [–2.40243] [–2.02139] [–1.23935] [–0.64836] [0.25354]
–0.039108 –0.068894 0.049448 0.086664
∆Ft–3
[–0.30035] [–0.53874] – – [0.35938] [0.62838]
0.627442* 0.423978* 0.234295 –0.046672 –0.024966 –0.273835***
∆St–1
[4.40192] [3.02872] [1.59148] [–0.32374] [–0.16418] [–1.79656]
0.309337** 0.269925*** 0.255529*** 0.135759 0.035749 –0.105644
∆St–2
[2.17483] [1.93234] [1.87322] [1.01630] [0.23990] [–0.70727]
0.06257 0.095104 –0.048433 –0.092567
∆St–3
[0.47133] [0.72947] – – [–0.35210] [–0.67136]
F-Statistics 7.905022 6.141697 4.506335 1.467048 3.689199 4.037896
Table 6g. Vector Error Correction Model
Company TCS Hindustan Unilever Ashok Leyland

0.000891 0.000891 0.000161 0.000154 0.000858 0.000851
C
[1.16187] [1.45760] [0.38094] [0.35853] [1.04988] [1.06331]
–0.96438* –0.002936 –0.112712*** 0.066499 –0.156643*** 0.006957
Et–1
[–16.5633] [–0.06325] [–1.89245] [1.10181] [–1.66212] [0.07534]
–0.03261 –0.20126 –0.115243 0.091101 –0.175568 0.025074
∆Ft–1
[–0.78161] [–0.60507] [–1.25899] [0.98213] [–1.19285] [0.17387]
– – 0.014560 0.060962 – –
∆Ft–2
[0.16693] [0.68931]
0.047264 0.031909 0.123059 –0.073232 0.264974*** 0.069349
∆St–1
[0.88862] [0.75243] [1.35489] [–0.79566] [1.76497] [0.47146]
– – –0.021798 –0.071111
∆St–2
[–0.25202] [–0.81133]
F-Statistics 190.6544 0.345454 1.822618 0.935858 5.461705 4.068775

Table 6h. Vector Error Correction Model
Company GAIL Hero Honda ITC

0.001050 0.001050 0.001189** 0.001241** 0.000963** 0.000950**
C
[1.55709] [1.59425] [2.35985] [2.40011] [2.31330] [2.25360]
–0.128094*** 0.029801 0.01533 0.191832* –0.087775 0.116252***
Et–1
[–1.72857] [0.41188] [0.28837] [3.51526] [–1.27686] [1.67047]
–0.242272** –0.019550 –0.10264 0.030083 –0.057990 0.204125**
∆Ft–1
[–2.05198] [–0.16959] [–1.25203] [0.35748] [–0.61468] [2.13725]
0.008988 0.074313 –0.11719 –0.028982 - -
∆Ft–2
[0.07966] [0.67453] [–1.43883] [–0.34663]
- - 0.039926 0.024319 - -
∆Ft–3
[0.50324] [0.29861]
- - 0.024503 0.01428 - -
∆Ft–4
[0.32251] [0.18310]
0.204530*** –0.014751 0.108893 –0.025491 0.025941 –0.224290**
∆St–1
[1.69732] [–0.12537] [1.36268] [–0.31075] [0.27807] [–2.37482]
–0.109400 –0.175433 0.050384 –0.033724 - -
∆St–2
[–0.94844] [–1.55770] [0.63619] [–0.41483]
- - –0.09279 –0.102423 - -
∆St–3
[–1.20378] [–1.29445]
- - –0.03791 –0.0436 - -
∆St–4
[–0.51396] [–0.57581]
F-Statistics 6.074388 4.113586 2.160372 4.617077 1.552467 4.581025
Table 6i: Vector Error Correction Model
Company ACC Ltd. BHEL ICICI Bank

0.000856*** 0.000864*** 0.00157** 0.001591* 0.001146*** 0.001152***
C
[1.66544] [1.71965] [2.31580] [3.38917] [1.66079] [1.67720]
–0.192811** –0.01009 –0.321179* 0.220491* –0.10374 0.061169**
Et–1
[–1.98780] [–0.11581] [–8.06726] [8.00063] [–0.91133] [2.53967]
0.062034 0.275311** 0.278515* 0.24911* –0.139185 0.169405
∆Ft–1
[0.46853] [2.12538] [6.97726] [9.01535] [–0.90453] [1.10568]
–0.060919 0.050293 0.066499*** –0.020177 0.017496 0.163593
∆Ft–2
[–0.46153] [0.38946] [1.73010] [–0.75834] [0.11179] [1.04973]
0.094496 0.17861 –0.166417* –0.049266*** –0.05001 0.142821
∆Ft–3
[0.73114] [1.41251] [–4.57860] [–1.95811] [–0.32158] [0.92234]
0.073786 0.150288 0.076567** 0.066702* –0.043086 0.134043
∆Ft–4
[0.58504] [1.21798] [2.37749] [2.99205] [–0.28019] [0.87545]
–0.072272 –0.015545 –0.007627 –0.006863 –0.097468 0.006239
∆Ft–5
[–0.59280] [–0.13033] [–0.25116] [–0.32649] [–0.65278] [0.04196]
(Table 6i continued)

(Table 6i continued)
Company ACC Ltd. BHEL ICICI Bank

0.113286 0.126046 –0.037788 0.000276 0.011756 0.049377
∆Ft–6
[0.99890] [1.13599] [–1.33317] [0.01406] [0.08229] [0.34712]
- - - - 0.184235 0.224252
∆Ft–7
[1.33963] [1.63765]
- - - - 0.083064 0.030618
∆Ft–8
[0.66615] [0.24661]
–0.031054 –0.238239*** –0.201677* –0.05424*** 0.234593 –0.063063
∆St–1
[0.24703] [–1.80904] [–4.50595] [–1.75066] [1.52238] [–0.41101]
0.033125 –0.081936 0.033079 –0.02684 –0.068722 –0.217645
∆St–2
[0.24703] [–0.62456] [0.77025] [–0.90285] [–0.43976] [–1.39874]
–0.088945 –0.180171 0.0521 –0.022159 0.046689 –0.150838
∆St–3
[–0.67748] [–1.40270] [1.29962] [–0.79852] [0.30045] [–0.97485]
–0.060148 –0.131995 –0.060943 –0.048596*** 0.025902 –0.158076
∆St–4
[–0.46930] [–1.05267] [–1.61152] [–1.85637] [0.16840] [–1.03218]
0.069222 0.007252 –0.027364 –0.049109** 0.057009 –0.046238
∆St–5
[0.55840] [0.05979] [–0.76068] [–1.97217] [0.38140] [–0.31068]
–0.130556 –0.140902 0.013215 –0.030591 –0.096453 –0.133275
∆St–6
[–1.13373] [–1.25063] [0.44779] [–1.49748] [–0.67412] [–0.93550]
- - - - –0.171415 –0.217
∆St–7
[–1.24514] [–1.58308]
- - - - –0.046577 0.004118
∆St–8
[–0.37309] [0.03313]
F-Statistics 1.029138 1.264703 20.61131 64.19944 3.07887 3.326022
Table 6j. Vector Error Correction Model
Company Aurobindo Pharma BPCL Bharat Forge

0.000842 0.000851 0.00058 0.000588 0.000274 0.000259
C
[1.05142] [1.07249] [0.98738] [1.01589] [0.33985] [0.32931]
–0.01206 0.34216*** –0.046693 0.173218 –0.27531*** –0.055199
Et–1
[–0.06192] [1.77257] [–0.59800] [2.25170] [–1.79412] [–0.36822]
0.247751 0.545718* 0.043893 0.30799* 0.027135 0.423858**
∆Ft–1
[1.18446] [2.62972] [0.43832] [3.12178] [0.14018] [2.24138]
–0.24068 –0.081355 –0.189823*** –0.019936 –0.032106 0.084504
∆Ft–2
[–1.18446] [–0.40403] [–1.89579] [–0.20209] [–0.16057] [0.43263]
–0.25852 –0.127049 –0.230203** –0.123294 0.076826 0.217043
∆Ft–3
[–1.35092] [–0.66997] [–2.36596] [–1.28619] [0.39873] [1.15310]
0.02255 0.130897 –0.16733*** –0.120777 –0.006016 0.030899
∆Ft–4
[0.12746] [0.74667] [–1.81211] [–1.32758] [–0.03220] [0.16930]
0.001258 0.035892 –0.027696 –0.036679 –0.162363 –0.13923
∆Ft–5
[0.00841] [0.24216] [–0.33153] [–0.44565] [–1.01833] [–0.89389]
(Table 6j continued)

(Table 6j continued)
Company Aurobindo Pharma BPCL Bharat Forge

–0.11777 –0.425635** –0.000398 –0.269972* 0.030987 –0.367526***
∆St–1
[–0.56254] [–2.05170] [–0.000396] [–2.72277] [0.15736] [–1.91055]
0.228526 0.075814 0.191371*** 0.012519 0.011183 –0.115825
∆St–2
[1.12528] [0.37673] [1.89772] [0.12601] [0.05510] [–0.58415]
0.251574 0.118247 0.263549* 0.152657 –0.117128 –0.264545
∆St–3
[1.31310] [0.62284] [2.68085] [1.57614] [–0.59860] [–1.38399]
0.014678 –0.103314 0.157096*** 0.113215 0.076301 0.033675
∆St–4
[0.08284] [–0.58841] [1.68298] [1.23107] [0.40150] [0.18139]
0.008346 –0.024393 0.007501 0.020499 0.167008 0.150878
∆St–5
[0.05632] [–0.16612] [0.08952] [0.24833] [1.03301] [0.95531]
F-Statistics 2.99481 5.52481 1.835159 4.142763 1.685734 2.218256
Table 6k. Vector Error Correction Model
Company Dr. Reddy ABB SBI

0.000533 0.000539 0.000930 0.000932 0.001292** 0.001298**
C
[1.15288] [1.16180] [1.29277] [1.35313] [2.36555] [2.45577]
–0.02966 0.22609*** 0.036914 0.241441*** 0.256649*** 0.453284*
Et–1
[–0.23093] [1.75370] [0.28174] [1.92463] [1.77345] [3.23793]
–0.276588*** 0.050702 –0.455296* –0.143144 –0.672963* –0.383736**
∆Ft–1
[–1.86895] [0.34131] [–2.76527] [–0.90800] [–3.63771] [–2.14431]
–0.241133 –0.067084 –0.363367** –0.207567 –0.528374* –0.413159**
∆Ft–2
[–1.63276] [–0.45253] [–2.19288] [–1.30827] [–2.84016] [–2.29581]
0.008881 0.141612 –0.232265 –0.168239 –0.359906*** –0.306895***
∆Ft–3
[0.06161] [0.97866] [–1.42167] [–1.07550] [–1.95608] [–1.72427]
–0.221713 –0.099802 –0.148130 –0.090076 –0.392769** –0.358267**
∆Ft–4
[–1.61316] [–0.72342] [–0.92734] [–0.58894] [–2.16667] [–2.04306]
–0.166095 –0.014181 –0.161794 –0.104421 –0.239986 –0.231119
∆Ft–5
[–1.25784] [–0.10699] [–1.03946] [–0.70066] [–1.35231] [–1.34631]
–0.130215 –0.055337 –0.194788 –0.121392 –0.460321* –0.442077*
∆Ft–6
[–1.02910] [–0.43569] [–1.31237] [–0.85419] [–2.65979] [–2.64060]
–0.121872 –0.050916 –0.298051** –0.258910** –0.303553*** –0.25866
∆Ft–7
[–1.03054] [–0.42892] [–2.26911] [–2.05865] [–1.82137] [–1.60439]
–0.003801 0.025536 – – 0.062099 0.054416
∆Ft–8
[–0.03725] [0.24929] [0.41742] [0.37813]
0.268748*** –0.046872 0.534950* 0.232224 0.729063* 0.445626**
∆St–1
[1.81834] [–0.31594] [3.17595] [1.43991] [3.88073] [2.45209]
0.230173 0.055246 0.381232** 0.217831 0.479808** 0.360596**
∆St–2
[1.56217] [0.37354] [2.25416] [1.34519] [2.54084] [1.97400]
–0.00464 –0.142106 0.244354 0.184581 0.365638*** 0.313223***
∆St–3
[–0.03227] [–0.98464] [1.46389] [1.15490] [1.95481] [1.73111]
(Table 6k continued)

(Table 6k continued)
Company Dr. Reddy ABB SBI

0.256351*** 0.128157 0.104731 0.042482 0.395381** 0.355523**
∆St–4
[1.86699] [0.92986] [0.64127] [0.27167] [2.14439] [1.99330]
0.128034 –0.033343 0.187235 0.118784 0.181555 0.174562
∆St–5
[0.96860] [–0.25130] [1.17492] [0.77849] [1.00475] [0.99866]
0.114624 0.04009 0.160375 0.081542 0.413779** 0.394735**
∆St–6
[0.90604] [0.31570] [1.05217] [0.55873] [2.34680] [2.31437]
∆St–7 0.156365 0.074292 0.328537** 0.285139** 0.321583*** 0.275446***
[1.32158] [0.62555] [2.42949] [2.20219] [1.89098] [1.67436]
–0.004771 –0.031792 – – –0.027654 –0.019287
∆St–8
[–0.04674] [–0.36297] [–0.18186] [–0.13112]
F–Statistics 1.556571 1.458463 1.818919 1.639587 2.976998 3.023394
Table 6l. Vector Error Correction Model
Company Maruti Suzuki Nifty Tata Steel

0.00125** 0.001282** 0.000515 0.000518*** 0.000882 0.000885
C
[2.06055] [2.11217] [1.44530] [1.89391] [1.32960] [1.35717]
Et–1 0.111348 0.312251** –0.04127 0.37422* –0.110541 0.076068*
[0.76415] [2.14149] [–0.74471] [8.79300] [–0.85378] [2.59783]
∆Ft–1 –0.452519** –0.06508 0.024851 –0.249961* –0.136751 0.039576
[–2.52826] [–0.36337] [0.43642] [–5.71601] [–0.78685] [0.23171]
∆Ft–2 –0.51761* –0.29688 –0.044012 0.413847* –0.04736 –0.052925
[–2.82490] [–1.61920] [–0.79569] [9.74253] [–0.27368] [–0.31120]
∆Ft–3 –0.381052** –0.220994 0.010742 –0.116956* 0.048719 0.034417
[–2.10053] [–1.21743] [0.19315] [–2.73826] [0.28993] [0.20841]
∆Ft–4 –0.317842*** –0.200938 0.006094 0.237088* –0.154309 –0.195464
[–1.78475] [–1.12757] [0.11703] [5.92870] [–0.94017] [–1.21182]
∆Ft–5 –0.350893** –0.256055 0.001852 –0.04542 0.075605 0.092756
[–2.01119] [–1.46666] [0.03638] [–1.16193] [0.46811] [0.58437]
∆Ft–6 –0.380279** –0.267232 –0.000833 0.159704* 0.249702 0.302078***
[–2.24076] [–1.57363] [–0.01811] [4.52054] [1.55967] [1.91992]
∆Ft–7 –0.349611** –0.26269 –0.008609 0.006158 –0.114563 –0.022756
[–2.13695] [–1.60462] [–0.19165] [0.17852] [–0.72422] [–0.14638]
∆Ft–8 –0.046103 –0.001353 0.030945 0.132722* 0.093904 0.111957
[–0.29939] [–0.00878] [0.87937] [4.91115] [0.60124] [0.72941]
∆Ft–9 –0.233283*** –0.221462*** –0.011983 –0.002421 0.109841 0.123093
[–1.74862] [–1.65894] [–0.34560] [–0.09092] [0.75362] [0.85936]
∆St–1 0.496163* 0.115784 0.01787 0.261431* 0.193078 0.035694
[2.77303] [0.64669] [0.30846] [5.87610] [1.09867] [0.20667]
∆St–2 0.49216* 0.266291 0.06162 –0.387662* 0.036781 0.034813
[2.69111] [1.45512] [1.11151] [–9.10537] [0.21072] [0.20294]
(Table 6l continued)

(Table 6l continued)
Company Maruti Suzuki Nifty Tata Steel

∆St–3 0.375799** 0.212319 –0.011319 0.104914** –0.025027 –0.014988
[2.07174] [1.16973] [–0.20344] [2.45542] [–0.14754] [–0.08991]
∆St–4 0.324747*** 0.200942 –0.025747 –0.239757* 0.139104 0.176853
[1.82251] [1.12697] [–0.49789] [–6.03704] [0.84037] [1.08717]
∆St–5 0.32094*** 0.221519 –0.013622 0.028074 –0.076051 –0.091045
[1.83757] [1.26751] [–0.26795] [0.71904] [–0.46685] [–0.56870]
∆St–6 0.360812** 0.24886 –0.058139 –0.203797* –0.2515 –0.305288***
[2.12346] [1.46365] [–1.29557] [–5.91352] [–1.55644] [–1.92246]
∆St–7 0.353026** 0.257494 0.040413 0.016608 0.13441 0.038171
[2.15526] [1.57101] [0.91153] [0.48777] [0.84221] [0.24332]
∆St–8 0.068665 0.015863 0.046205 –0.048604** –0.019396 –0.039021
[0.44469] [0.10267] [1.52464] [–2.08837] [–0.12296] [–0.25171]
∆St–9 0.212105 0.202585 0.016548 0.012303 –0.061949 –0.075254
[1.58561] [1.51346] [0.54862] [0.53112] [–0.42132] [–0.52079]
F–Statistics 1.449056 1.197853 1.997637 71.44685 2.089759 2.509521
Table 6m. Vector Error Correction Model
Company Dabur Ranbaxy Reliance Infra

0.000784 0.000926 0.0004 0.000398 0.000695 0.00067
C
[1.04929] [1.10677] [0.73666] [0.75704] [0.95953] [1.104181]
–0.30889* 0.068234 0.118299*** 0.294555* –0.112114 0.310717*
Et–1
[–4.22470] [0.83355] [1.94941] [5.02099] [–1.00521] [3.32716]
–0.441686* –0.038103 –0.11449 –0.101388 0.00244 0.470826*
∆Ft–1
[–5.76408] [–0.44414] [–1.31388] [–1.20359] [0.02347] [5.39988]
–0.303146* –0.051823 –0.25806* –0.239896* –0.139188 0.367023
∆Ft–2
[–4.01542] [–0.61312] [–2.96663] [–2.85277] [–1.33480] [4.20405]
–0.219564* –0.092059 –0.212962** –0.215047** –0.060693 0.334455*
∆Ft–3
[–3.01250] [–1.12817] [–2.46626] [–2.576161] [–0.57882] [3.80979]
–0.148724** –0.058951 –0.150004*** 0.003873 0.01063 0.271294*
∆Ft–4
[–2.13716] [–0.75663] [–1.74479] [0.04660] [0.10166] [3.09884]
–0.132759** –0.010074 –0.223476* –0.280763* 0.00311 0.272629*
∆Ft–5
[–2.04375] [–0.13852] [–2.61650] [–3.40041] [0.03013] [3.15407]
–0.11022*** 0.034845 –0.267531* –0.261744* 0.038162 0.245897*
∆Ft–6
[–1.93175] [0.54547] [–3.14599] [–3.18392] [0.37796] [2.90893]
–0.034299 0.013759 –0.127964 –0.206578* 0.0079 0.176977**
∆Ft–7
[–0.81093] [0.29056] [–1.57649] [–2.63263] [0.08077] [2.16128]
– – –0.182911** –0.221575* –0.004168 0.122653
∆Ft–8
[–2.28403] [–2.86211] [–0.04449] [1.56369]
(Table 6m continued)

(Table 6m continued)
Company Dabur Ranbaxy Reliance Infra

– – –0.117836 –0.241919* 0.054773 0.081344
∆Ft–9
[–1.49630] [–3.17769] [0.62119] [1.10189]
– – –0.010074 –0.021028 0.000117 0.003801
∆Ft–10
[–0.12944] [–0.27950] [0.00143] [0.05531]
– – – – –0.001095 –0.042385
∆Ft–11
[–0.01491] [–0.68924]
– – – – –0.046185 –0.000564
∆Ft–12
[–0.76021] [–0.01109]
– – – – 0.017105 –0.15289
∆Ft–13
[0.37831] [–0.40390]
0.46176* –0.006587 0.147979*** 0.142759*** 0.023084 –0.427804*
∆St–1
[6.09300] [–0.07764] [1.68236] [1.67890] [0.22032] [–4.87691]
0.331935* 0.023273 0.247261* 0.216048** 0.104213 –0.393794*
∆St–2
[4.39981] [0.27553] [2.81312] [2.54264] [0.99600] [–4.49538]
0.224427* 0.054716 0.248082* 0.256389* 0.062383 –0.320384*
∆St–3
[3.05820] [0.66596] [2.83946] [3.03558] [0.59210] [–3.63209]
0.158457* 0.040779 0.178228** 0.015125 –0.051032 –0.308114*
∆St–4
[2.24353] [0.51570] [2.04550] [0.17957] [–0.48684] [–3.51081]
0.094766 –0.051596 0.23051* 0.298613* –0.005784 –0.269334*
∆St–5
[1.42331] [–0.69216] [2.65447] [3.55712] [–0.05599] [–3.11407]
0.084736 –0.068756 0.255982* 0.250146* –0.023667 –0.225741*
∆St–6
[1.41887] [–1.02833] [2.95593] [2.98799] [–0.23478] [–2.67474]
0.065781 –0.00252 0.123271 0.206536* 0.009342 –0.149732***
∆St–7
[1.39229] [–0.04763] [1.49617] [2.59310] [0.09595] [–1.83693]
– – 0.256271* 0.290794* 0.038866 –0.086628
∆St–8
[3.14763] [3.69463] [0.41880] [–1.11495]
– – 0.14251*** 0.265511* –0.010874 –0.045869
∆St–9
[1.77529] [3.42142] [–0.12499] [–0.62978]
– – –0.037177 –0.031212 0.048448 0.037695
∆St–10
[–0.46888] [–0.40720] [0.59966] [0.55727]
– – – – –0.044304 –0.003092
∆St–11
[–0.62039] [–0.051721]
– – – – 0.039089 –0.015223
∆St–12
[0.67704] [–0.31492]
– – – – –0.039225 –0.00796
∆St–13
[–0.99680] [–0.24161]
F–Statistics 23.22714 1.220846 2.375154 4.20961 1.775956 30.36303

Table 6n. Vector Error Correction Model

Company Cipla Tata Motors Canara Bank

0.000591 0.000592 0.0001071*** 0.0001053*** 0.000866 0.000888
C
[1.35135] [1.35813] [1.74968] [1.73743] [1.19546] [1.22601]
–0.198261** 0.081350 –0.025842 0.174371** –0.045852 0.176943***
Et-1
[–2.21464] [0.91174] [–0.28842] [1.96441] [–0.45780] [1.76736]
0.098337 0.323120* 0.062244 0.357107* –0.028107 0.200339
∆Ft-1
[0.92967] [3.06497] [0.50910] [2.94825] [–0.20639] [1.47165]
– – –0.129943 –0.021437 –0.317079** –0.238181***
∆Ft-2
[–1.06599] [–0.17751] [–2.36768] [–1.77922]
– – –0.266669** –0.202228*** –0.264628** –0.278876**
∆Ft-3
[–2.42617] [–1.85716] [–2.15799] [–2.27504]
–0.064594 –0.292784* 0.027954 –0.251503** 0.126214 –0.107053
∆St-1
[–0.61056] [–2.77672] [0.22703] [–2.06180] [0.92597] [–0.78570]
– – 0.124493 0.005552 0.280688** 0.194192
∆St-2
[1.01944] [0.04589] [2.09111] [1.44727]
– – 0.239022** 0.179249*** 0.257348** 0.266691**
∆St–3
[2.18089] [1.65087] [2.09808] [2.17508]
F-Statistics 2.451094 5.477501 3.644226 7.416816 4.002065 4.765920
Notes: * testifies that values are significant at 1 per cent level (critical value: 2.58); ** testifies that values are significant at
5 per cent level (critical value: 1.96); *** testifies that values are significant at 10 per cent level (critical value: 1.65).
The VECM results reveal that 14 stocks, namely, HCL-Tech, Mahindra & Mahindra, Bharat Electrical
Ltd., Grasim, MTNL, Andhra Bank, BHEL, BPCL, ABB Ltd., SBI, Maruti Suzuki, Ranbaxy, Tata
Motors and Canara Bank exhibit a feedback relationship (bilateral causality) since coefficients of lagged
values of independent variables are significant in both the cases (spot and futures). Seven stocks, namely,
Infosys, Tata Power, Wipro, Ashok Leyland, Gail, Dr. Reddy and Dabur demonstrate unilateral causality
from spot to futures because coefficients of lagged value of spot price series as an independent variable
are significant but not the vice versa. Thirteen stocks, namely, HPCL, Oriental Bank of Commerce,
Ambuja Cement, RIL, Natl. Alum., Union Bank, ITC, ACC Ltd., Aurobindo Pharma, Bharat Forge, Tata
Steel, Reliance Infra, Cipla and Nifty indicate unilateral causality from futures to spot because coeffi-
cients of lagged value of futures price series as an independent variable are significant but not the vice
versa. Seven stocks, namely, Punjab National Bank, Bank of Baroda, Bank of India, TCS, Hindustan
Unilever, Hero Honda and ICICI Bank show no causality since coefficients of lagged value of futures
and spot (as an independent variable) are insignificant.
Error correction coefficient is used to find out the lead–lag relationship between spot and futures price
series of stocks. Results depict that in case of 18 stocks, the error correction term for futures equation is
negative and significant while for spot it is positive/negative but insignificant. This suggests that only
futures returns respond to correct a shock in order to reach the long-run equilibrium. Similarly 18 stocks’
and Nifty’s error correction term for spot equation is positive and significant while for futures it is nega-
tive/positive but insignificant, which shows that only spot market returns respond to correct a shock in
order to reach the long-run equilibrium. Five stocks, namely, Mahindra & Mahindra, MTNL, BHEL, SBI

and Ranbaxy show significant positive/negative error correction terms for futures/spot equations. This
suggests that when the cointegration vector is above/below equilibrium, then both the returns, i.e., spot
and futures, increase/decrease in order to obtain their equilibrium positions.
Overall, futures leads the spot price in case of Nifty and 21 stocks, namely, Infosys, HPCL,
Oriental Bank of Commerce, Tata Power, Andhra Bank, Hero Honda, ITC, ICICI Bank, Aurobindo
Pharma, BPCL, Dr. Reddy, ABB, SBI, Maruti Suzuki, Tata Steel, Reliance Infra, Tata Motors,
Canara Bank, Mahindra & Mahindra, MTNL, Ranbaxy. In accordance with the widely-accepted
hypothesis of futures market with its lower transaction costs, ease of leverage and absence of short
selling restriction, the Indian futures market is able to provide early information to the spot market.
The results are consistent with the results of Gupta and Singh (2006). Besides this, 20 stocks,
namely, HCL-Tech, Punjab National Bank, Bharat Electrical Ltd., Grasim, Bank of Baroda, Ambuja
Cement, Bank of India, RIL, Natl. Alum., Wipro, Union Bank, TCS, Hindustan Unilever, Ashok
Leyland, GAIL, ACC Ltd., Bharat Forge, Dabur, Cipla and BHEL are found to be led by the spot
market. The possible reason behind this could be the complex derivative market. These results are
consistent with the results of Mukherjee and Mishra (2006) and Pradhan and Bhat (2009) who
reported that the spot market leads the futures market.
F-values given in the tables are used to check the overall significance of the model. Results depict that
out of 41 stocks, only one stock, i.e., ITC, has a significant spot equation but insignificant futures equa-
tion, which means that the estimated model is not able to explain variations in futures price series. Six
stocks, namely, HCL-Tech, Wipro, TCS, Hindustan Unilever, Maruti Suzuki and Dabur have significant
futures equations but insignificant spot equations, which means that the estimated model is not able to
explain variations in the spot price series. One stock, i.e., ACC Ltd., shows no significance in either
equation, which means that neither spot nor futures estimated model is able to explain the variation. The
remaining 33 stocks and the index have a joint significance.
Conclusion
The present study purports to find out the price discovery and causality between the spot and futures
price series of individual securities and Nifty. The results point a long-run relationship between the two
price series. Johansen’s cointegration and residual-based approach are used to find out the long-run rela-
tionship between the series. The presence of cointegration justifies the use of VECM. This study reports
a significant lead–lag relationship between futures and spot price series. In case of Nifty and 21 securi-
ties, the futures market leads the spot market. Besides this, the results also indicate that 20 stocks are
being led by the spot price. Since most of the stocks show either unilateral or bilateral causality, it
appears that both spot and futures markets are playing an important price discovery role. Overall, this
article provides evidence on the empirical relationship between the spot and futures markets. The pres-
ence of cointegration proves that spot and futures prices share common long-run information and prices
cannot move far away from each other. This study also finds that both the markets, i.e., futures and spot,
play an important price discovery role, implying that futures (spot) prices may contain useful informa-
tion about spot (futures) prices. These results are consistent with the results of Floros (2009). This study
may be extended further by considering high frequency data and large sample sizes to examine price
discovery.

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Price Discovery Process in Nifty Spot Global Business Review

India Quarterly, 66, 2 (2010): 133–149

Global Business Review, 14, 1 (2013): 55–88

Global Business Review, 14, 1 (2013): 55–88

Data Source and Time Period

Rt = ln (Pt /Pt – 1) (1)

Unit Root Test

Global Business Review, 14, 1 (2013): 55–88

Engle and Granger’s Cointegration Test (Residual-Based Approach)

Granger Causality Test

Global Business Review, 14, 1 (2013): 55–88

Johansen’s Cointegration and Vector Error Correction Model

where λ1 is the largest value and λn is the smallest one.

λmax (r, r + 1) = –T ln (l – λr+1) (6)

where λ is the eigenvalue.

The Lamda Trace (λtrace) Test

Global Business Review, 14, 1 (2013): 55–88

Empirical Results and Discussion

Global Business Review, 14, 1 (2013): 55–88

Table 1. Descriptive Statistics

Global Business Review, 14, 1 (2013): 55–88

Global Business Review, 14, 1 (2013): 55–88

Unit Root Test

Table 2. Unit Root Test

Closing Price First Difference

Global Business Review, 14, 1 (2013): 55–88

Global Business Review, 14, 1 (2013): 55–88

Global Business Review, 14, 1 (2013): 55–88

Global Business Review, 14, 1 (2013): 55–88

Global Business Review, 14, 1 (2013): 55–88

Table 3. Unit Root Tests for Residuals

Augmented Dickey–Fuller Test Phillip–Perron Test

Source: Authors’ findings.

Global Business Review, 14, 1 (2013): 55–88

Granger Causality Test

Table 4. Granger Causality Test

Global Business Review, 14, 1 (2013): 55–88

Global Business Review, 14, 1 (2013): 55–88

Johansen’s Cointegration Test

Table 5. Johansen’s Cointegration Test

Global Business Review, 14, 1 (2013): 55–88

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Error Correction Model

Global Business Review, 14, 1 (2013): 55–88

Table 6a. Vector Error Correction Model

Company HCL-Tech Infosys Punjab National Bank

Variables ∆Ft ∆St ∆Ft ∆St ∆Ft ∆St

Table 6b. Vector Error Correction Model

Company HPCL Mahindra & Mahindra Bharat Electrical Ltd.

Variables ∆Ft ∆St ∆Ft ∆St ∆Ft ∆St

Global Business Review, 14, 1 (2013): 55–88

Table 6c. Vector Error Correction Model

Company Grasim Bank of Baroda Oriental Bank of Commerce

Variables ∆Ft ∆St ∆Ft ∆St ∆Ft ∆St

Global Business Review, 14, 1 (2013): 55–88

Table 6d. Vector Error Correction Model

Company Ambuja Cement Bank of India RIL

Variables ∆Ft ∆St ∆Ft ∆St ∆Ft ∆St

Table 6e. Vector Error Correction Model

Company MTNL Tata Power Natl. Alum.

Variables ∆Ft ∆St ∆Ft ∆St ∆Ft ∆St

Global Business Review, 14, 1 (2013): 55–88

Rt = ln (Pt /Pt – 1) (1)

λmax (r, r + 1) = –T ln (l – λr+1) (6)