Decision (September 2016) 43(3):239–258

DOI 10.1007/s40622-016-0137-1

RESEARCH PAPER

Domestic and international information linkages

between NSE Nifty spot and futures markets:
an empirical study for India
Sanjay Sehgal . Mala Dutt

Published online: 26 July 2016

Ó Indian Institute of Management Calcutta 2016

Abstract This paper examines the information Keywords Information linkages  Price discovery 
linkages between NSE Nifty Index spot and futures Volatility spillover  Bivariate GARCH–BEKK model
in India and Nifty futures traded on international
platforms from August 2008 to March 2015. We find JEL Classification G13  G14  G15  C32
that, at domestic level, Nifty spot leads Nifty futures in
the price discovery process. Further, NSE futures lead
all the three international exchanges, namely, SGX,
Introduction
OSE and CME. This confirms that NSE is the
dominant platform for Nifty trading, while the inter-
The global equity market amounted to USD 81 trillion
national exchanges act as satellites. The information
in terms of the value of share trading during the year
path for transmission of Nifty price signals brings out
2014, registering a growth of 17.4 % over the
geographical proximity, trading costs, trading hours,
previous year, while the number of trades rose by
information access and currency denomination of
23.7 % during the same period. This trend has also
Nifty futures contracts at individual exchanges as
continued in the first half of 2015, with both value of
major factors for the lead–lag relationships. Short-
share trading as well as number of trades witnessing a
term volatility spillover path is from Nifty spot to
still higher growth of 36 % over the corresponding
futures on NSE, and NSE leads two of the three
period of 2014, thereby indicating the continuing
international counterparts (SGX and OSE). No signif-
good performance of the global equity markets
icant long-term volatility spillovers are observed
(World Federation of Exchanges 2014, 2015). India
domestically as also internationally, except bilateral
being one of the fastest growing emerging economies
information transmission between NSE and SGX. The
(International Monetary Fund 2015) stirs up a natural
dominance of NSE Nifty spot suggests that hedgers
curiosity amongst investors, researchers and policy
play an important role in both price discovery as well
makers about the status of its equity market with
as risk hedging. These findings are relevant for policy
respect to linkages within the domestic segments as
makers, portfolio managers as well as the academic
well as with the global markets. Such linkages can be
community.
examined in terms of the extent of information
transmission taking place between different trading
S. Sehgal  M. Dutt (&) platforms which can provide useful implications for
Department of Financial Studies, University of Delhi, all stakeholders and help to improve the intra- and
New Delhi 110 021, India cross-market efficiency of the equity market in India.
e-mail: maladutt61@gmail.com

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240
Consequently, this paper aims to study the dynamics
of information transmission in terms of price discov-
ery and volatility spillovers within the equity market
in India and across international trading platforms.
While the price discovery process can provide insights
about lead–lag relationships between different mar-
kets, volatility spillovers can provide inputs for
designing appropriate risk management strategies.
For the study, the CNX Nifty Index has been selected
as a proxy for India’s equity market, since it trades on
the National Stock Exchange of India (NSE) which is
India’s biggest stock exchange in terms of volume as
well as value. The NSE handled a total of 1832.80
million equity trades during 2014–15, as compared to
711.10 million handled by India’s second biggest
exchange, the Bombay Stock Exchange (BSE). The
total value of these contracts at NSE was USD 708.07
billion as compared to USD 139.80 billion at BSE. The
Nifty Index spot is a value-weighted stock index trading
since 1 April 1996, comprising 50 largest and most
liquid Indian securities. Futures based on Nifty Index
were introduced by NSE on 12 June 2000. Nifty futures
were also offered for trading on the Singapore
Exchange (SGX) with effect from 25 September
2000, followed by the Chicago Mercantile Exchange
(CME) from 19 July 2010 and the Osaka Securities
Exchange (OSE) from 24 March 2014. Options based
on Nifty Index were launched by NSE from 4 June
2001. Offshore, they are offered only on SGX since 16
July 2012. In view of this position, Nifty spot and
futures have been covered in the study, while options
are excluded. Nifty volumes on the sample exchanges,
and the major contract specifications of Nifty Futures,
including trading time and costs at each exchange, are
given in Appendices 1 and 2, respectively.
Both Nifty spot and futures are regulated by the
Securities and Exchange Board of India (SEBI) under
the provisions of the SEBI Act, 1992. Returns are
expected to differ across the two segments, particu-
larly because the Securities Transactions Tax (STT) is
levied on them at different rates (0.1 % each on
purchaser and seller of equity spot and 0.01 % payable
by the seller of equity futures). Besides, there are other
trading costs such as brokers’ spreads and commis-
sions, taxes on income, account maintenance fees and
interest on margin loans that may differ across trading
platforms, especially between the Indian exchanges
and those abroad. Such varying costs, along with
different price changes and volatility patterns, could
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Decision (September 2016) 43(3):239–258
lead to different net returns on individual platforms as
well as differences in risk-hedging opportunities,
giving rise to possibilities of inter-exchange arbitrage
and trade migration from the lower net return platform
to the others. Such a move would be detrimental to any
country. It would, therefore, be interesting to examine
these aspects in terms of the implications that may
arise from testing the information transmission
through price discovery and volatility spillovers
relating to the equity market in India.
In view of the above, the main objectives of the
study are: (1) to test the information transmission
process in terms of price discovery between spot and
futures segments of Nifty in India and between Nifty
futures in India and their counterpart international
exchanges, namely CME, SGX and OSE; (2) to test
the information transmission process in terms of
volatility spillovers between the exchanges referred
above; and (3) to provide policy suggestions for
achieving greater market integration and ensuring
higher operational efficiency in Nifty trading.
The rest of the paper is organized as follows:
section ‘Literature review’ reviews the existing liter-
ature; section ‘Data sources and description’ provides
details of the data; section ‘Price discovery process—
domestic and international linkages’ describes the
methodology and empirical results along with their
interpretation relating to price discovery; section
‘Volatility spillover process—domestic and interna-
tional linkages’ describes the methodology and results
along with interpretation relating to volatility spil-
lovers; and finally, section ‘Summary, conclusions and
policy suggestions’ gives the summary, conclusions
and policy suggestions.
Literature review
The literature on information transmission relating to
equity markets can be studied in terms of spot and
futures segments within the same market and across
markets in different countries. Alternatively, it can be
examined with reference to the major information
linkages examined in the literature, namely price
discovery and volatility spillovers, which could relate
to studies on Indian markets or foreign markets or both.
The present study presents the literature in terms of the
second approach, beginning with the concept of each
information linkage, followed by empirical evidence.
Decision (September 2016) 43(3):239–258
Price discovery
Malkiel and Fama (1970) describe the process of price
discovery as ‘return transmission’ from one market to
another, while Schreiber and Schwartz (1986) define it
as ‘the process by which markets attempt to find their
fair prices’ and state that if markets are efficient and
frictionless, then price discovery should be instanta-
neous and contemporaneous. However, in practice,
between the spot and futures segments or across
different trading venues of the same stock, price
discovery takes place in one market and the other
markets follow it. The market leader is the one which
provides necessary trading platform or environment to
transform the information into prices which, in turn, is
transmitted to other markets. Hasbrouck (1995) relates
a market’s contribution to price discovery in terms of
its information share, defining the latter as the
proportion of efficient price innovation variance that
can be attributed to that market. Lehmann (2002)
refers to price discovery as ‘the incorporation of the
information implicit in investor trading into market
prices’.
In the empirical literature, the seminal study on
lead–lag relationship in price discovery between two
equity platforms is by Garbade and Silber (1979) who
analyse stock prices of five actively traded corpora-
tions on the New York Stock Exchange (NYSE) and
two regional stock exchanges during August 1973 to
September 1975. They point out that if communication
and other costs between markets are zero, prices will
be identical across markets, which represent the case
of perfectly integrated markets. However, prices may
differ between markets for short periods of time, in
which case the adjustment of prices between Markets
A and B may be either symmetrical where prices in
Market A move towards those in Market B at the same
speed as the reverse adjustment, or may be one-sided
where prices in Market B usually adjust towards prices
in Market A, with some time delay determined by the
speed of communications. In the case of second
argument, Market A is ‘dominant’ and Market B is a
‘satellite’. The study concludes that regional
exchanges are satellites, but not pure satellites, as
they do contain information relevant for NYSE traders
but are not completely integrated with NYSE.
Kawaller et al. (1987) study S&P 500 Index and its
futures during 1984–1985 and show that futures lead
its spot segment. Stoll and Whaley (1990) also study
241
S&P 500, over an extended period from April 1982 to
March 1987, again finding the futures segment
leading the stock index. Wahab and Lashgari (1993)
also study the same markets and find the futures
weakly leading the spot, with marginal difference
insufficient for arbitrage possibilities, thereby con-
cluding that their results reflect market efficiency.
Ghosh (1993) also examines S&P 500 Index and its
futures during a 10-year period from 1988 to 1998 and
finds evidence of futures again leading its spot. Tse
(1995) utilizes daily prices of Nikkei Stock Average
Index and futures, along with error correction model
for the period December 1988 to April 1993, and
again finds futures leading the index in the short run.
Fleming et al. (1996) study the impact of trading costs
on price discovery in the spot and futures markets in
USA. They find the futures leading the price discovery
on account of lower trading costs as compared to the
spot market, thereby emphasizing the role of trading
costs in determining the lead position of one market
vis-à-vis the others. Pizzi et al. (1998) also examine
S&P 500 Stock Index and futures contracts from
January to March 1987 and find bi-lateral causality
between the two, but stronger from the futures to the
spot.
An important factor in price discovery is the extent
of automated trading in stock market (Brailsford et al.
1999). Initially, the study finds evidence of a substan-
tial bi-directional information flow between the spot
and futures segments in Australia, but by focusing on
the period surrounding the move towards automated
trading, a significant change in the information
transfer process between the markets is observed,
which is consistent with the hypothesis that automated
trading results in a richer and timely information set
that accelerates the price discovery process.
Brooks et al. (2001) study the FTSE 100 Index and
its futures and using different trading strategies, they
also find the futures leading the spot market. Similarly,
So and Tse (2004) study the Hang Seng Index and its
futures in Hong Kong and find the futures market
leading the spot index. Kang et al. (2006) investigate
KOSPI 200 Index and its futures markets during
October 2001 to December 2002 and conclude that
futures lead the spot prices. Bohl et al. (2011) study the
index spot and futures in Poland from April 2005 to
December 2007 and find the spot market leading the
futures market, which is in contrast to earlier studies
which find the futures leading the spot market.
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Frino et al. (2013) investigate whether offshore
markets lead to migration of futures’ volume from
domestic to foreign markets, employing turnover data
of Nikkei 225 futures, Nifty futures and MSCI Taiwan
futures, which are also traded on SGX besides the home
market, covering the period May 2003 to May 2008.
They find a positive and significant impact of turnover
in offshore market on the domestic market turnover in
respect of all the three index futures, suggesting that
relevant officials might wish to formulate a plan that
promotes arbitrage trading amongst simultaneously
traded cross-listed securities in order to attract even
more trading by global financial institutions.
Judge and Reancharoen (2014) study Stock
Exchange of Thailand (SET)’s SET50 Index and its
futures during 2006–2012, employing daily data and
the error correction model, besides Granger causality
test. They find evidence of spot leading the futures and
indicate that this result may be due to higher trading
volume and turnover in spot segment as well as faster
adjustment of spot prices to market-wide information,
as compared to futures prices.
In the Indian context, Kumar and Chaturvedula
(2007) analyse Nifty’s constituent stocks’ spot and
futures segments during January 2004 to March 2007
and find the price discovery share of the spot market to
be higher. Gupta and Singh (2009) also examine these
two markets, besides 50 most liquid stocks, from April
2003 to March 2007 and find futures market domi-
nating the information transmission process. Using
Johansen’s cointegration procedure and VECM, Mis-
hra et al. (2013) examine these markets from Decem-
ber 2001 to December 2012 and find the spot segment
playing the dominant role in price discovery. How-
ever, Choudhary and Bajaj (2013) study Nifty spot and
futures between June 2000 and August 2010 and
conclude that futures lead the spot market. Price
discovery with respect to Nifty spot and futures (as
well as options) is also examined by Sehgal et al.
(2015), covering the period November 2003 to
December 2013. Their results show that the spot
market leads the price discovery process, followed by
the futures market (and then the options market).
Volatility spillovers
Highlighting the significance of volatility, Kyle (1985)
states that information is revealed in the volatility of
stock prices rather than the price itself. Ross (1989)
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Decision (September 2016) 43(3):239–258
finds a positive relation between volatility and the rate
of information flow. When comparing markets, Hong
(2001) indicates that a market is characterized as
dominant when it assimilates all the new information
more quickly in its price and has stronger volatility
spillovers as compared to other markets. Wang et al.
(2005) refer to the quantity of news (size of innova-
tion) and quality of news (sign of innovation) deter-
mining the magnitude of volatility spillovers across
markets and point out that ‘asymmetric’ or ‘leverage’
effects associated with equity returns involve a
different degree of predictability of bad news’ impact
on future volatility as compared to good news.
Essentially, volatility spillovers refer to the impact
of an innovation from one market (or one segment) on
the conditional variance of another market (or another
segment), with information transmission taking place
in two spheres, namely own-volatility spillovers and
cross-volatility spillovers (Gagnon and Karolyi 2006).
As regards the empirical literature, King and
Wadhwani (1990) find failure in one market mecha-
nism being transmitted to other markets and increase
in volatility leading to an increase in the size of
‘contagion’ effects, as shown by increasing correlation
between markets. Engle et al. (1990) study interna-
tional linkages in volatility between major trading
regions into which the world is partitioned on the basis
of a 24-h calendar day. Two particular patterns of
volatility are described, namely the heat wave, in
which volatility in one region is primarily a function of
the previous days’ volatility in the same region, and
the meteor shower, in which volatility in one region is
driven by volatility in the region immediately preced-
ing it in terms of calendar time.
Antoniou and Holmes (1995) examine the impact
of trading in FTSE 100 Stock Index futures on
volatility of underlying spot market using GARCH
model and employing daily price data. They find that
futures trading leads to increased volatility in the spot
market, but more significantly, they conclude that
volatility may not necessarily be a ‘bad thing’ as it
may be a direct result of an increase in the rate of flow
of information from one market to another. Koutmos
and Booth (1995), Brailsford (1996) and Booth and
Ciner (1997) consider information transmission
through volatility spillovers, specifically across inter-
national exchanges. They find interdependence
between markets located in different countries, con-
sistent with contemporaneous market reactions
Decision (September 2016) 43(3):239–258
showing correlation between markets induced by
international news. Kavussanos et al. (2008) use a
bivariate VECM–GARCH model on stock index data
from Greece, covering a period from 2000 to 2003 and
conclude that there exist significant spillover effects
from futures to the spot market. Huang and Kuo (2015)
analyse information transmission between stock mar-
kets in Mainland China, Hong Kong and Taiwan
during the period 2000–2012, using trivariate BEKK–
GARCH model. The results show volatility spillovers
from Mainland China to Hong Kong and Taiwanese
markets. But, cross-market influences are smaller as
compared to domestic influences, which support the
home bias hypothesis. Also, smaller influence on
Taiwan could be due to shorter trading hours in
Taiwan as compared to the other two markets.
Clements et al. (2015) consider the transmission of
volatility in equity markets, apart from the foreign
exchange and bond markets, and using data from January
2005 to February 2013 relating to USA, find the ‘meteor
shower effect’ in the transmission of volatility from one
region to another on the same trading day as being
significant and at least as important as the ‘heat wave
effect’ which is the normal effect estimated in traditional
volatility models. Volatility transmission is also studied
by Jin (2015) for China, Hong Kong and Taiwan for the
period July 1993 to June 2013 by estimating VAR–
BEKK model and finds that all three markets are
interrelated through their returns and/or volatilities and
that they are increasingly getting integrated as evident
from the decreasing impact on expected conditional
variances of each market. One reason put forth for
increasing integration is volatility arbitrage by market
participants through the use of derivatives.
In the Indian context, empirical work by Debasish
(2009) is based on GARCH modelling of Nifty spot
and futures, which concludes that futures market serves
its prescribed role of pricing efficiency and improves
the quality of information flowing to the spot market.
Pati and Rajib (2011) show a bi-directional volatility
spillover between Nifty spot and futures market. In
addition to price discovery, Sehgal et al. (2015) also
test for information linkages relating to volatility as
well as higher order moments (skewness and kurtosis)
with respect to Nifty spot and futures. They find the
spot market leading the volatility spillover process.
As is evident from the above, the spot and futures
segments of international equity markets have been
studied extensively with respect to price discovery as
243
well as volatility spillovers. Studies on the Nifty Index
and its futures are also numerous, but these have
focussed largely on the price discovery process and
also do not provide consistent evidence for either spot
or the futures segment dominating the other in price
discovery. Further, there are few studies that examine
the volatility spillover process. More importantly, the
international dimension of Nifty futures trading has
been totally ignored in the literature, as there does not
appear to be any study which examines information
linkages between the domestic and the international
platforms where Nifty futures are traded. Furthermore,
the existing studies do not cover any period after 2013.
This important gap in the literature regarding lack of a
study on the equity market in India, covering infor-
mation transmission through the first two moments
(price change and volatility) for both spot and futures
segments in the domestic market and also encompass-
ing the international dimension, as well as containing
more recent data up to March 2015, is sought to be
filled through the present study.
Data sources and description
The study uses price data on Nifty spot and futures
traded domestically on the NSE as well as Nifty futures
traded on SGX, CME and OSE. The data consist of
daily closing prices for both spot and futures. For
futures prices, contracts nearest to maturity are taken
into account, as amongst contracts of different matu-
rities, trading volumes are expected to be highest for
these contracts (Zhong et al. 2004; Sehgal et al. 2013).
The period covered is August 2008 to March 2015. In
CME and OSE, Nifty futures were launched in July
2010 and March 2014, respectively. Hence, for anal-
ysis relating to these two exchanges, data on Nifty
futures at NSE have also been taken from the respective
dates. Pair-wise analysis has been undertaken between
domestic spot and futures series of Nifty and between
domestic and international Nifty futures, after exclud-
ing non-trading days, such as holidays in world
markets, and making the remaining data date syn-
chronous (Andersen et al. 2003). For each data series,
prices are converted into daily log returns by taking the
first difference of the log-transformed series. All price
data have been extracted from the Bloomberg
database. The Nifty contracts and exchanges selected
for the study are given, in brief, in Table 1.
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Table 1 Trading platforms, Nifty contracts and period covered in the study
Exchange/country Spot
1 NSE, India CNX Nifty Index
2 SGX, Singapore – SGX CNX Nifty Index Futures
3 CME, USA – E-mini CNX Nifty Index Futures
4 OSE, Japan – S&P CNX Nifty Index Futures
Spot and futures contract titles are from websites of respective exchanges
Price discovery process—domestic
and international linkages
Methodology
To begin with, each log price series is tested for
stationarity through the augmented Dickey–Fuller
(ADF) Test (1981).1 For pairs of series that are found
to be integrated of the same order, the Johansen’s
(1991) cointegration procedure is applied, using the
lag length selected on the basis of Schwarz Informa-
tion Criteria (SIC). For those pairs where cointegra-
tion relationship is confirmed, residual diagnostic
tests are undertaken through vector autoregression
(VAR) estimated with the selected lag, to check the
appropriateness of the model by determining whether
the model satisfies the stability, normality as well as
no serial correlation criterion amongst the variables.
Once existence of at least one long-run relationship as
well as appropriateness of the model is confirmed, the
vector error correction model (VECM) is tested for
obtaining the lead–lag relationship between each pair.
The VECM results are reconfirmed through the
Granger causality test. Testing of the price discovery
process is undertaken at two levels—at domestic level
between Nifty spot and futures segments on NSE and
at international level for all pairs between Nifty
futures on NSE, SGX, CME and OSE. Analysis is
undertaken separately at domestic and international
levels because the domestic and international markets
have significant differences in characteristics, partic-
ularly in terms of the nature of participants and
efficiency levels. Participants in the domestic market
are mainly retail investors who typically operate at
1
ADF test uses the existence of a unit root as the null
hypothesis. The lag length for the autoregressive process is
selected on the basis of lag length which minimizes the Schwarz
Information Criterion (SIC).
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Decision (September 2016) 43(3):239–258
Futures Period covered
CNX Nifty Futures August 2008–March 2015
Same as above
July 2010–March 2015
March 2014–March 2015
lower volumes and less frequently, as compared to
international markets that are dominated by institu-
tional investors engaged in higher volumes, who trade
more frequently. Efficiency levels are also lower in
the domestic platforms due to lower investments in
infrastructure and also dated technology, leading to
less advanced operating systems as compared to
international platforms. For these reasons, unless the
analysis is undertaken separately for domestic and
international markets, the results may be erroneously
affected by these factors. Further, analysis is under-
taken pair-wise, because the dates of origin as well as
non-trading days vary across the sample series; taking
all the series together would considerably reduce the
number of observations to 232 (size of the shortest
series) or even lower.
The results obtained from various tests are inter-
preted in the light of nuances in institutional, trading
and regulatory architecture of exchanges in India and
abroad, so as to bring out policy suggestions for
achieving greater market integration and ensuring
higher efficiency of the equity market in India.
Descriptive statistics
Descriptive statistics of return series are discussed
below, but not presented here due to paucity of space.
However, they are available on request.
Domestic level
In the domestic market, daily mean returns are
marginally higher for Nifty futures (0.0411 %) com-
pared to Nifty spot (0.0409 %), implying annualised2
mean returns of 10.28 and 10.23 %, respectively.
2
Daily mean returns have been annualised by assuming a
250-day trading year.
Decision (September 2016) 43(3):239–258 245

Table 2 Price discovery—domestic level analysis

Lag length Null hypothesis Trace statistic p value Maximum eigen value p value

Panel A: Cointegration between Nifty spot and futures at NSE

2 r=0 121.1364 (0.0001)* 120.6434 (0.0001)*
r=1 0.4931 (-0.4826) 0.4931 (-0.4826)
Market Error correction coefficient t value

Panel B: Vector Error Correction Model

Nifty_S -0.3378 [-2.0181]**
Nifty_F -0.5626 [-3.2248]*

Null hypothesis F statistic p value

Panel C: Granger causality

Nifty_S does not Granger cause Nifty_F 5.2767 (0.0052)*
Nifty_F does not Granger cause Nifty_S 4.0119 (0.0183)**
Lag length is based on the minimum value of Schwarz Information Criterion
r = cointegration rank of the model
Nifty_S denotes Nifty Index spot traded at NSE, India; Nifty_F denotes Nifty Index futures traded at NSE, India
Figures in () brackets denote p values; Figures in [] brackets denote t values
* Significance at 1 % level; ** significance at 5 % level

Daily standard deviation is also higher for futures
(1.55 %) as compared to spot (1.49 %). The Sharpe
(1975) ratios show positive risk-adjusted returns for
both, but they are higher for spot. Thus, Nifty spot
shows lower returns and lower volatility, but higher
risk-adjusted return as compared to Nifty futures.
Both spot and futures series show positive skewness
and leptokurtic distribution, implying non-normality
which is confirmed by the Jarque–Bera (JB) statistic,
indicating that both markets are informationally
inefficient. The ARCH test on residuals indicates
presence of volatility clustering in both series, point-
ing towards the need to undertake analysis of the
second moment through a conditional volatility model
to test volatility spillover effects between the series.
The Ljung–Box (LB) statistic shows evidence of
autocorrelation at level as well as for squared residuals
for both series, confirming inter-temporal dependen-
cies in prices. In sum, both the Nifty spot and futures
series are not i.i.d.
International level
Daily mean returns on Nifty futures are higher at CME
(0.045 %) and SGX (0.042 %) as compared to NSE
(0.041 %). In contrast, they are lower at OSE
(0.110 %) as compared to NSE (0.111 %). The same
trend is seen for daily standard deviation which, as
compared to NSE, is higher at CME and SGX but
lower at OSE. The Sharpe ratio is positive for all, and
as compared to NSE, is higher at CME and marginally
lower at SGX, while it is the same at OSE. All series
are positively skewed and leptokurtic, implying non-
normality and also tend to have autocorrelation,
thereby violating the i.i.d properties.
Empirical results
Domestic level
The ADF unit root test on the two log price series
(Nifty spot and futures on NSE) shows non-stationar-
ity at level, but stationarity at first difference.3
Cointegration results (Panel A of Table 2) based on
trace and maximum eigen value indicate the presence
of one co-integrating relationship between the two
series, confirming the presence of a long-run equilib-
rium relationship and the presence of price discovery
process between the spot and futures segments in the
3
Results of the stationarity test are not reported in the paper in
view of space constraint, but are available on request.

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Nifty market. VAR adequacy test results4 reveal that
both sample series satisfy the stability as well as no
serial correlation criterion. As regards normality, both
series are found to be non-normal, but normality may
not be a serious issue in the light of the fact that sample
size is large, i.e. 1629 observations for each series.
Therefore, it is concluded that the model fulfils the
adequacy criterion for both series, confirming the
appropriateness of the model. The VECM results
(Panel B of Table 2) show bi-directional adjustment
by both series towards long-run equilibrium, with the
spot segment leading the price discovery process. The
Granger causality results (Panel C of Table 2) also
indicate bi-directional causality between spot and
futures series, but the ‘spot does not Granger cause
futures’ is significant at 1 % level, while the reverse is
significant at 5 %. Hence, causality is stronger from
the spot to the futures, thereby reconfirming the
VECM result.
The lead position of spot segment over the futures in
price discovery can be explained through the higher
risk-adjusted returns from Nifty spot as compared to the
futures (see section ‘Domestic level’). An important
implication of this finding is that investors first take a
position in the spot market and then focus on futures
prices. In other words, participants in the derivatives
market are largely those with exposure in the underlying
spot market. This is reassuring, as it dispels the notion
that equity market is dominated by speculative traders.
However, results also point towards general lack of
interest in futures trading per se, implying that derivative
instruments still have to develop as an alternate
investment asset amongst investors in the domestic
market. The lead position for spot is despite the cost
advantage that futures have in terms of a lower STT rate.
International level
The log price series relating to Nifty futures at NSE and
all the three international exchanges are also non-
stationary at level, but are stationary at first difference.
Cointegration results for pairs of platforms including
NSE (Panel A of Table 3) show the presence of at least
one co-integrating relationship between Nifty futures at
NSE and each of the three international exchanges and
also between pairs of international exchanges,
4
Results of the VAR adequacy test are not reported in the paper
due to space constraint, but are available on request.
123
Decision (September 2016) 43(3):239–258
confirming that all platforms share common long-run
equilibrium relationship. VAR adequacy test has been
performed for all pairs of futures prices, and the results
confirm that the model is appropriate (see footnote 4).
VECM results for pairs between NSE and each of the
three international exchanges (Panel B (i) of Table 3)
show that there is bi-directional adjustment towards
long-term equilibrium between NSE and SGX and
between NSE and OSE, with NSE leading the price
discovery process more strongly in both cases. As
regards NSE and CME, there is uni-directional adjust-
ment with NSE leading again. Granger causality results
(Panel C (i) of Table 3) reconfirm bi-directional
causality between SGX and NSE, almost equal from
both sides. Between NSE and CME, causality is again
bi-directional, but stronger from NSE. Between NSE
and OSE, causality is uni-directional from NSE to OSE.
Hence, unequivocally, NSE leads the price discovery
process vis-à-vis all the three international platforms. In
other words, NSE is the dominant market, while all the
three international exchanges are satellites.
As regards pairs of international platforms, VECM
results (Panel B (ii) of Table 3) show that between
SGX and CME, SGX leads; between SGX and OSE,
both make adjustments but SGX again leads; and
finally, between CME and OSE, OSE leads. Granger
causality tests (Panel C (ii) of Table 3) reconfirm these
findings. Thus, both SGX and OSE, which are bigger
exchanges in terms of volume, lead CME where
volumes have fallen drastically in the last few years.
Considering the price discovery results at the
domestic and international levels together, the trans-
mission of price signals appear to originate in the spot
segment on NSE, which move to the futures segment
on NSE, and from there, to Nifty futures at SGX,
followed by movement to OSE and lastly to CME.
Thus, the complete information path for transmission
of Nifty price signals becomes evident, which can be
depicted graphically as given in Fig. 1.
The results show that SGX and OSE both lead CME
in price discovery, which may appear surprising.
However, these could be explained, at least partially,
in terms of location of these platforms in different time
zones and differences in trading hours available at
each exchange. Singapore (SGX) is 2 ‘ h ahead of
Mumbai (NSE) and Osaka (OSE) 3 ‘ h ahead, while
Chicago (CME) is 10 ‘ h behind Mumbai (in
summer). Also, NSE trades for only 6  h per day,
while SGX and OSE trade for 16 h (SGX—5 min
Decision (September 2016) 43(3):239–258 247

Table 3 Price discovery—international level analysis

Markets Null hypothesis Lag length Trace statistic p value Maximum eigen value p value

Panel A: Cointegration analysis

NSE_F and SGX_F r=0 3 406.866 (0.0001)* 406.4219 (0.0001)*
r=1 0.4437 (-0.5054) 0.4437 (-0.5054)
NSE_F and CME_F r=0 3 29.3888 (0.0002)* 29.3842 (0.0001)*
r=1 0.0046 (-0.9451) 0.0046 (-0.9451)
NSE_F and OSE_F r=0 1 127.027 (0.0001)* 122.6877 (0.0001)*
r=1 4.3391 (0.0372)** 4.3391 (0.0372)**
SGX_F and CME_F r=0 3 29.6423 (0.0002)* 29.6382 (0.0001)*
r=1 0.0041 (-0.9479) 0.0041 (-0.9479)
OSE_F and SGX_F r=0 1 137.327 (0.0001)* 133.245 (0.0001)*
r=1 4.0823 (0.0433)** 4.0823 (0.0433)**
OSE_F and CME_F r=0 1 17.8249 (0.0219)** 14.0687 (0.0536)***
r=1 3.7562 (0.0526)*** 3.7562 (0.0526)***
Market Error correction coefficient t value

Panel B (i): VECM analysis

NSE_F 1.799 [4.9009]*
SGX_F 2.868 [7.6133]*
NSE_F -0.0226 [-1.5238]
CME_F 0.063 [3.6331]*
NSE_F -0.3336 [-1.9463]***
OSE_F 0.8467 [6.7324]*
Panel B (ii): VECM analysis
SGX_F 0.0233 [1.6350]
CME_F -0.0587 [-3.6199]*
OSE_F -0.8255 [-6.9831)*
SGX_F 0.365 [2.2279]**
OSE_F 0.0139 [0.4873]
CME_F -0.1221 [-3.5810]*

Null hypothesis F statistic p value

Panel C (i): Granger causality analysis

SGX_F does not Granger cause NSE_F 16.8386 (0.0000)*
NSE_F does not Granger cause SGX_F 17.5661 (0.0000)*
CME_F does not Granger cause NSE_F 3.2526 (0.0211)**
NSE_F does not Granger cause CME_F 26.3844 (0.0000)*
OSE_F does not Granger cause NSE_F 0.0043 (-0.9477)
NSE_F does not Granger cause OSE_F 188.477 (0.0000)*
Panel C (ii): Granger causality analysis
SGX_F does not Granger cause CME_F 27.7564 (0.0000)*
CME_F does not Granger cause SGX_F 3.1251 (0.0251)**
SGX_F does not Granger cause OSE_F 204.975 (0.0000)*
OSE_F does not Granger cause SGX_F 0.0734 (-0.7867)
OSE_F does not Granger cause CME_F 21.352 (0.0000)*

123
248
Table 3 continued
Null hypothesis
CME_F does not Granger cause OSE_F
Lag length is based on the minimum value of Schwarz Information Criterion
r = cointegration rank of the model
NSE_F and SGX_F denotes Nifty Index futures traded on NSE and SGX, respectively; other pairs are interpreted in the same manner
Figures in () brackets denote p values; Figures in [] brackets denote t values
* Significance at 1 % level; ** significance at 5 % level; *** significance at 10 %
Niy
Niy Spot at
Futures at
NSE
NSE
Fig. 1 Information path for price discovery process between NSE and international platforms for Nifty trading
short of 16 h; OSE—16 h 35 min), and CME operates
almost round-the-clock (22 h on Sunday to Thursday
and 23 h on Friday). Further, keeping in view the
actual opening and closing time, SGX and CME get
full 6  h of common time with India, while OSE gets
about 5 h of common time with India. (Fig. 2 indicates
the trading hours at each exchange in terms of the
Coordinated Universal Time).
However, the reverse does not hold. Accordingly,
there are long hours when all the three international
exchanges are open but NSE is not. Specifically, the
timings available at SGX are such that they allow
trading and risk management in response to breaking
news during Asia, Europe and US hours. In terms of
local time at individual platforms, when NSE opens at
9.15 a.m., it is 11.45 a.m. in SGX and 12.45 p.m. in
OSE, implying that SGX and OSE are both already
open. Further, SGX will continuously remain open till
after NSE closes while OSE will close (for lunch) for
an hour and 20 min before reopening while NSE is
operating. So, trading may be rather active in both
these platforms (SGX and OSE), more so in SGX
because it operates without a break during the trading
hours at NSE. But in Chicago, the local time is 10.45
p.m. of the previous evening, and although the market
is open, trading activity may be sluggish as it is almost
approaching midnight (this is particularly relevant
because Nifty futures has registered a sharp fall in
volumes in the last 2 years of the sample period). In
addition, there is a delay in data dissemination by at
least 10 min as per CME’s website. Hence, when NSE
opens, the nearest market is SGX which is
123
Decision (September 2016) 43(3):239–258
F statistic p value
0.6235 (-0.4305)
Niy Niy Niy
Futures at Futures at Futures at
SGX OSE CME
continuously open, and therefore, SGX picks up the
price signals first, from where they are transmitted to
OSE and eventually to CME. Thus, price signals move
eastward in different time zones. This analysis
supports Janakiramanan and Lamba (1998) and
Johansson and Ljungwall (2009) who highlight geo-
graphical proximity as one of the factors responsible
for markets exerting significant impact on each other.
Another major factor that could result in lead–lag
relationship in price discovery is the varying cost of
trading across platforms. As per SGX’s website, there
are no transaction or capital taxes, except brokers’
spread. In contrast, costs payable at NSE include the
STT of 0.010 % since 1 June 2013 (which was 0.017 %
till 31 May 2013) on sale of futures payable by seller;
stamp duty of 0.002 % on value of shares transferred in
derivatives segment; SEBI turnover fees of 0.0002 % of
the price at which securities are purchased or sold;
service tax at the rate of 12.36 %5 on brokers who
charge the clients (although it is exempted if services are
partly performed outside India and payment is received
in convertible foreign exchange within 6 months); and
finally, commission charged by NSE, amounting to Rs.
1.90 (USD 0.03) each side per lakh of traded value for
first Rs. 2500 crore (USD 377 million), and graded
thereafter, in the futures segment. A comparison of
trading costs at selected global exchanges shows that
mandatory (i.e. statutory) costs as percentage of total
5
Service Tax rate was revised to 14.00 % with effect from 1
June 2015, and thereafter, has risen to 14.5 % (inclusive of the
Swachh Bharat Cess) with effect from 15 November 2015.
Decision (September 2016) 43(3):239–258
Fig. 2 Trading hours at NSE, SGX, OSE and CME
transaction costs are significantly higher in India than
that in other exchanges (Malik 2014). Moreover, at
international exchanges such as CME, fees for clearing
and trading vary, depending on whether the product is
traded on the floor or electronically. Besides, on certain
exchanges, such as OSE, discounts on trading fees or
even incentives, are payable to trading participants for
ensuring smooth circulation and improving liquidity on
the exchange. Also, margins are lower at SGX and other
exchanges as compared to NSE. Another significant
difference is that SGX as well as other international
exchanges automatically extend the benefit of protec-
tion against currency risk to investors, in contrast to NSE
where the same investors need to take a separate position
on the currency derivatives market in India, in addition
to taking a position in Nifty futures so as to hedge against
currency risk. (In fact, it is only in June 2014 that foreign
investors have been permitted to participate on
exchange-traded currency derivatives in India to the
extent of their net worth exposure in the equity market).
Further, practical difficulties in accessing Nifty futures
at NSE are expected, due to factors such as lack of clear
and systematically placed information on NSE’s web-
site and insufficient technology upgradation, as com-
pared to the ease of accessing international exchanges.
Despite these obstacles, the results show that traders are
still active in India, setting up information paths that
originate at NSE. However, high transaction charges
and taxes in the securities market in India may
incentivize other avenues of investment at the cost of
the securities market.
Yet another factor for the lead–lag relationships could
possibly be the level of regulation that investors have to
deal with at different exchanges. For example, at SGX, a
249
person can own up to 25,000 Nifty futures contracts net
on the same side of the market and in all contract months
combined. The restriction on a client is, therefore, in
terms of number of contracts held, and not in terms of the
financial interest involved. Clearing members can also
seek higher position limits for their customers on a case-
by-case basis. In contrast, FII’s position limits in equity
index futures contracts in India are fixed in monetary
terms (USD 75 million) or 15 % of total open interest in
the market for index futures, subject to further restriction
relating to gross open position for each client across all
derivative contracts. Naturally, the SGX market is less
regulated, and therefore, more attractive to investors.
Results also show that in respect of price transmission,
regional integration and linkages are much stronger than
international linkages, for the equity market in India. This
is evident from SGX and OSE catching the price signals
earlier than CME. It is also significant that evidence of
price linkages originating from NSE and travelling across
the world indicates robustness of the price discovery
process, led by the Indian market.
These results lead to several significant implications
for policymakers which are discussed in the final section
on ‘Summary, conclusions and policy suggestions’.
Volatility spillover process—domestic
and international linkages
Methodology
To examine information transmission in the second
moment between Nifty spot and futures in the domestic
market and between Nifty futures across international
123
250
exchanges, the volatility spillover process is tested, and
the chosen model is GARCH–BEKK (generalized
autoregressive conditional heteroskedasticity—Baba
et al. 1990), since it is parsimonious and can also
guarantee the positive definiteness of the variance–
covariance matrix under weak conditions. (1,1) order
has been used in the model for the ARCH and GARCH
terms since it is widely considered adequate in
describing financial market volatility (Li 2015). The
analysis is performed separately at domestic and
international levels, and the model is used in bi-variate
form, for reasons mentioned in section ‘Methodology’.
The conditional mean equation is as follows:
X
2
cit ¼ li0 þ lij cj;t1 þ eit
j¼1
where eit jIit1  N ð0; hit Þ; i ¼ 1; 2
In the above equation, i = 1, 2 denotes the bivariate
model, cit is the estimated residual of the sample
series, eit is the random error term with conditional
variance hit and Iit-1 denotes market information at
time t - 1. The conditional variance equation is
defined in matrix notation, as under:
Ht ¼ C0 C þ A0 et1 e0t1 A þ B0 Ht1 B;
where Ht is a 2 9 2 residuals’ conditional variance–
covariance matrix with information known at time
t - 1 and before; diagonal elements denote condi-
tional variance of returns in each market, while off-
diagonal elements measure co-variance between them.
The elements of A, B and C matrices are as follows:
   
a11 a12 b11 b12
A¼ B¼
a21 a22 b21 b22
 
c11 0
c¼
c21 c22
Matrix A is a 2 9 2 matrix where the diagonal
elements (a11 and a22) measure the ARCH (clustering)
effects in spot and futures segments, respectively,
while off-diagonal elements (a12 and a21) represent
short-term volatility spillovers between them. In
matrix B, the diagonal elements (b11 and b22) measure
GARCH (persistence) effects within the two markets,
while off-diagonal elements (b12 and b21) represent
long-term volatility spillovers between them. C is a
lower triangular 2 9 2 matrix of constants, which
guarantees the positive definiteness of Ht.
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Decision (September 2016) 43(3):239–258
Just as for the price discovery process, testing for
volatility spillovers through the above procedure is
also undertaken at two levels—(1) domestic level
between spot and futures segments of Nifty; and (2)
international level between Nifty futures on NSE and
on SGX, CME and OSE.
Empirical results
Domestic level
In the domestic market (Table 4), no significant
ARCH or GARCH effects are observed in either the
spot or the futures segments. Also, no significant long-
term (LT) volatility spillovers are observed. But,
short-term (ST) spillovers are significant from the spot
to the futures segment.
Evidence of significant ST volatility spillovers
from Nifty spot to the futures is in line with price
discovery results that show the dominance of spot over
the futures. Further, absence of any significant LT
volatility linkages implies that investors primarily
focus on developing ST, rather than LT, price-hedging
strategies. Accordingly, they could execute ST strate-
gies by considering the difference in the variance
between spot and futures segments. Typically, they
could go long in futures market where variance is high
and go short in the underlying spot where volatility is
low. Hedge ratios, computed on the basis of variance–
covariance matrix, could be relied upon by investors to
determine the extent of hedging required to cover their
exposure in the spot market. Higher is the futures
contracts’ volatility, better will be the hedge ratio,
because cost of hedging will be lower, as investors will
be required to buy a lesser number of futures contracts
to hedge the risk. Absence of any significant LT
volatility linkages perhaps reflects the need to intro-
duce longer maturity Nifty contracts beyond three
nearest serial months currently available on NSE, on
the lines of quarterly contracts on March, June,
September and December cycle offered on SGX and
CME.
Combining the results of price discovery and
volatility spillovers for the domestic market, the spot
segment clearly emerges as the dominant platform
compared to the futures segment. These results are
consistent with the findings of Sehgal et al. (2015).
The findings reinforce the implication drawn earlier
Decision (September 2016) 43(3):239–258 251

Table 4 Volatility spillovers—domestic level analysis Lack of LT risk-hedging activity in India could also
Variable Coefficient Z statistic
be due to the general risk-averse nature of retail
investors in India who are generally inclined towards
Nifty spot and futures on NSE investing in safer assets in spot market, rather than
l1 0.0008 [2.9445]* taking positions in the futures market. This would
l2 0.0008 [2.9775]* explain price and ST volatility signals originating
c(1,1) 0.0017 [2.9537]* from the spot market at NSE, characterized by large
c(2,1) 0.0001 [0.0678] volumes implying predominance of retail investors.
c(2,2) 0.0000 [0.0000] Despite their preference for small portfolios and their
a(1,1) -0.1297 [-0.5466] general risk-averse attitude, retail investors are
a(1,2) -0.4806 [-1.9500]*** increasingly exerting influence on dynamics of the
a(2,1) -0.1239 [-0.4905] equity market in India. Therefore, they need to be
a(2,2) 0.2484 [0.9491] progressively drawn into the derivatives segment
b(1,1) 0.5282 [0.5854] through sustained awareness and financial literacy
b(1,2) 0.8511 [0.9064] campaigns highlighting benefits of the same.
b(2,1) 0.4177 [0.4856]
b(2,2) 0.1555 [0.1735] International level
Log Likelihood 12776.72
In respect of comparison between NSE and interna-
Models estimated using QMLE with robust (heteroskedasticity/
misspecification) standard errors. ‘l’ denotes the mean
tional exchanges (Panel A of Table 5), significant
equation coefficients. In the variance equations, ‘c’ denotes ARCH and GARCH effects are observed both in NSE
the constant terms, ‘a’ denotes the ARCH terms, i.e. and SGX as well as significant bi-directional ST as
coefficients of square of one period residual terms (est-1, well as LT volatility spillovers between them. But, ST
eft-1) and ‘b’ denotes the GARCH terms, i.e. coefficients of
one period variance/covariance terms (hst-1, hft-1)
spillovers are stronger from NSE to SGX, while LT
One refers to Nifty Spot and 2 refers to Nifty Futures. Thus,
spillovers are stronger in the reverse direction.
coefficient a(1,1) represents ARCH (clustering) effect within the Between NSE and OSE, there are no significant
Nifty spot market, while the cross-coefficient a(1,2) represents ARCH or GARCH effects as well as no LT spillovers,
the short-term volatility spillover from Nifty spot to Nifty but significant ST spillovers exist from NSE to OSE.
futures; similarly, the coefficient b(1,1) represents GARCH
(persistence) effect within the Nifty spot market, while b(1,2)
Between NSE and CME, again there are no significant
represents the long-term volatility spillover from Nifty spot to ARCH or GARCH effects and also no significant
Nifty futures; and other coefficients are interpreted in the same volatility spillovers either in the short or long term.
manner As regards pairs of international platforms (Panel B
Figures in [] brackets denote Z statistics of Table 5), between SGX and CME, there are signif-
* Significance at 1 % level; ** Significance at 5 % level; icant ARCH and GARCH effects in SGX and also
*** Significance at 10 % level GARCH effects in CME. Besides, significant bi-direc-
tional ST volatility spillovers are observed between
that the equity market in India is dominated by hedgers them, which are stronger from CME to SGX. LT
rather than speculative traders. However, the lack of spillovers are also present one-way in the reverse
LT risk hedging in the domestic market is probably direction (from SGX to CME), but these are weak
due to inadequate appreciation and use of derivatives (significant at 10 % level). As regards OSE and CME,
as a long-term hedging tool by Indian investors. significant ARCH and GARCH effects exist in OSE and
Moreover, in the aftermath of the global financial ARCH effects in CME. There are also ST spillovers that
crisis in 2008, a considerable part of the trading and move one-way from OSE to CME, but they are weak
industrial community in India suffered losses from (again significant at 10 % level), while there are no
positions taken in the derivatives market without significant LT spillovers. Between OSE and SGX, there
proper familiarisation with their operations and are no significant ARCH or GARCH effects or any
impact. This experience may have also contributed volatility linkages, just as for NSE and CME.
towards a general reluctance on part of Indian In sum, the ST volatility spillover path in the
investors to participate in the derivatives market. domestic market is from Nifty spot to Nifty futures,

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implying that domestic financial institutions (DFIs)
and portfolio funds use Nifty futures at NSE as a
hedging platform. At international level, NSE leads
two (SGX and OSE) of the three international
counterparts, particularly SGX (which is also dom-
inated by CME), while no significant ST volatility
spillovers are observed between NSE and CME. It
seems that the FIIs and other global investors based in
USA use SGX platform for risk hedging in Nifty
futures, instead of NSE, which is indicative of trade
migration from India and is, therefore, a matter of
concern for policy makers. This may be an outcome
of higher trading costs or greater regulation or
impediments in market microstructure on Indian
exchanges. Policy makers need to address these
issues on urgent basis to ensure global competitive-
ness of Indian exchanges, at least for financial assets
which originate in India.

Table 5 Volatility spillovers—international level analysis

Variable NSE_F–SGX_F Z statistic NSE_F–CME_F Z statistic NSE_F–OSE_F Z statistic

Panel A: Between NSE and international platforms

l1 0.0012 [4.6005]* 0.0070 [3.2099]* 0.0009 [1.4857]
l2 0.0012 [4.2492]* -0.0028 [-1.1752] 0.0009 [1.4092]
c(1,1) -0.0013 [-1.0177] 0.0200 [1.8641]*** 0.0066 [4.9948]*
c(2,1) 0.0001 [0.0229] -0.0225 [-1.8605]*** -0.0011 [-0.3287]
c(2,2) 0.0000 [0.0000] 0.0000 [0.0000] 0.0000 [0.0000]
a(1,1) 0.8728 [8.5371]* 0.1530 [0.3679] -0.0409 [-0.4337]
a(1,2) 1.1598 [10.2552]* -0.1151 [-0.2741] -0.4201 [-3.820]*
a(2,1) -0.8873 [-9.4231]* -0.1925 [-1.0678] -0.0626 [-0.4814]
a(2,2) -1.0586 [-10.366]* 0.2763 [1.4271] -0.0639 [-0.4876]
b(1,1) -0.8332 [-3.1214]* 0.4947 [0.2345] 0.4054 [0.8725]
b(1,2) -1.2708 [-4.6619]* 0.4992 [0.2347] 0.4682 [0.6396]
b(2,1) 1.7623 [6.7995]* 0.4939 [0.2344] 0.3906 [0.9877]
b(2,2) 2.1898 [8.2671]* 0.4987 [0.2360] 0.5133 [1.0764]
Log Likelihood 12356.38 5936.91 1563.73
Variables SGX_F –CME_F Z statistic OSE_F–SGX_F Z statistic OSE_F–CME_F Z statistic

Panel B: Between international platforms

l1 0.0028 [3.2492]* 0.0712 [0.3732] 0.0009 [1.6167]
l2 -0.0025 [-4.0922]* 0.0715 [0.3826] 0.0012 [1.4357]
c(1,1) 0.0118 [4.2524]* 0.0001 [0.0001] -0.0019 [-0.1871]
c(2,1) -0.0072 [-4.0107]* -0.0293 [-0.0111] -0.0102 [-0.1468]
c(2,2) 0.0000 [-0.0000] 0.0001 [0.0000] 0.0000 [0.0000]
a(1,1) 0.2488 [2.9522]* 0.4797 [0.0199] 0.3182 [2.4407]**
a(1,2) -0.2521 [-3.3616]* 0.4797 [0.0159] -0.1399 [-1.9409]***
a(2,1) -0.514 [-5.0508]* 0.4826 [0.0350] -0.0511 [-0.3751]
a(2,2) 0.1784 [1.8941]*** 0.4825 [0.0183] 0.4144 [2.7142]*
b(1,1) 0.4948 [1.9070]*** 0.5000 [0.0042] 0.8383 [4.8575]*
b(1,2) 0.4817 [1.8982]*** 0.5000 [0.0030] -0.0674 [-0.0843]
b(2,1) 0.4937 [1.5338] 0.5000 [0.0042] 0.2274 [0.5399]
b(2,2) 0.4808 [1.4847] 0.5000 [0.0030] 0.0906 [0.2191]
Log Likelihood 6948.17 473.84 1560.65
NSE_F and SGX_F denotes Nifty futures traded on NSE and SGX, respectively; other pairs are interpreted in the same manner
1 and 2 refer to Nifty futures at the two Exchanges, in the order in which they appear at the head of the column
Remaining notes are same as for Table 4

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Decision (September 2016) 43(3):239–258
Niy Spot at Niy Futures at
NSE NSE
Note: Denotes Short-term Volatility Spillovers in the direction of the arrow
Denotes Long-term Volatility Spillovers in both directions
Fig. 3 Information path for volatility spillover process between NSE and international platforms for Nifty trading
As regards LT volatility spillovers, they are con-
spicuously absent amongst domestic segments, indi-
cating that Indian investors work on short horizons and
do not engage in LT hedging. At international level, no
significant patterns in LT volatility spillovers are
observed except bilateral information transmission
process between NSE and SGX futures.
Combining the results for volatility spillover pro-
cess for both domestic and international markets, the
information path for this process can be represented as
follows (Fig. 3).
Based on the information paths of price discovery
and volatility spillovers that have emerged from the
study, on overall basis, NSE’s spot segment of Nifty
dominates both NSE as well as international platforms
of Nifty futures. Thus, despite high trading costs and
other disadvantages at NSE as well as trade migration
from India, as seen in discussion above, NSE acts as
leader in price discovery and volatility spillover
process. It could be due to active traders being
primarily concentrated in India or due to general
inertia on the part of Indian investors to continue to
trade on NSE despite higher costs. Alternatively, it
could be ascribed to lack of awareness about cost
advantages on foreign platforms or to indirect, latent
barriers that restrict access of domestic investors,
particularly retail investors, to foreign markets. Such
barriers may include more innovative systems, or
higher speed of operations, or even the sheer scale of
operations, on foreign exchanges. Indian investors
may also be reluctant to trade on foreign exchanges
due to difference in time and in total trading hours
between the platforms, which result in foreign markets
operating when midnight is approaching (SGX and
OSE) and even during night time (CME) in India that
253
Niy Futures at
OSE
Niy Futures at Niy Futures at
SGX CME
prevents Indian investors from actively participating
in trading during those hours.
The results also show that while global investors seem
to be taking trade positions on NSE, they do not prefer to
use it for price hedging. Relevant capital market reforms
may correct this behaviour in future and make NSE a
preferred platform for risk hedging by international
investors as well, thereby, also allow it to play a more
dominant role in the information transmission process.
Summary, conclusions and policy suggestions
This study examines information transmission in terms
of price discovery and volatility spillovers in the equity
market within India and across international markets
during the period August 2008 to March 2015. The
platforms used in the study are India’s NSE where Nifty
Index spot and its futures are traded, and three
international exchanges (SGX, CME and OSE) where
Nifty futures are traded. The study employs the
cointegration procedure and VECM, supported by
Granger causality, to study the price discovery process
and the bivariate BEKK–GARCH (1,1) model to
examine the volatility spillover process. In the domestic
market, the spot leads the futures segment in price
discovery as well as in ST price hedging, while LT risk
hedging is virtually absent. At the international level,
India’s dominance is observed vis-à-vis all the three
international exchanges in respect of price discovery.
But in respect of risk hedging, lead is observed again
only in ST price hedging, that too, vis-à-vis only two
international exchanges (i.e. SGX and OSE), while no
significant patterns regarding LT volatility spillovers are
observed, except for bilateral information transmission
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254
process between NSE and SGX futures. These findings
point towards the need for relevant capital market
reforms to make NSE a preferred platform for risk
hedging by international investors, which would enable
it to play a more dominant role in the information
transmission process. Such a step will help to establish
the dominance of Nifty futures internationally as well as
lay the foundation for eventually developing India into a
global financial centre.
Some relevant policy reforms that may be considered
are as follows: first, NSE should operate at least till
midnight every day and should be open also on Sundays.
This will ensure that trading is available on NSE during
the daytime operation of SGX, OSE as well as for a
reasonable part of trading hours on CME. Additionally,
opening the market on Sundays will enable investors in
the USA, particularly Indian investors, to participate in
Nifty trading on NSE rather than on CME. Second, access
to trading on NSE and other domestic platforms should be
made fully investor-friendly, for both domestic and
foreign investors, by placing all information relevant to
such investors on a single link on the website, so that
navigation requires a single-window approach. Third,
domestic retail investors who are increasingly exerting
influence on dynamics of the equity market should be
progressively drawn into the derivatives segment through
sustained awareness and financial literacy campaigns
aimed at promoting the use of derivatives as an effective
hedging tool in India. Fourth, NSE and other domestic
exchanges should consider introducing dollar-denomi-
nated futures to extend currency protection to investors to
eliminate this weakness in the domestic futures contract
vis-à-vis contracts on international exchanges. The final
suggestion is that, in addition to the three nearest serial
months’ Nifty futures contracts, four quarterly contracts
should also be introduced on NSE, as in the case of CME
and SGX. Such a step will encourage LT hedging in India
which is currently non-existent. It may be noted that the
first suggestion has also partially been recommended by
the Standing Council on International Competitiveness of
the Indian Financial Sector,6 but in this paper, it is backed
by strong empirical evidence.
6
Government of India’s Standing Council on International
Competitiveness of the Indian Financial Sector, in Volume 1
(Sect. 6.6, sub-Sect. 1, pp 35–36) of their Report entitled
‘International Competitiveness of Currency, Equity and Com-
modity derivatives markets’, has recommended as under:
‘(h) Indian exchanges should time market opening to overlap
with SGX.’.
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Decision (September 2016) 43(3):239–258
Besides the policy suggestions that have
emerged from this study, policy makers can also
use the models employed in the study to develop
them into a monitoring tool to continuously exam-
ine the strength and direction of price and volatility
triggers and use the results to make suitable mod-
ifications in policy to increase volumes traded on
domestic platforms, prevent trade migration from
India and ensure dominance of Indian exchanges
over their counterpart exchanges abroad. The find-
ings are also relevant for institutional investors and
portfolio managers as they can utilize the results to
draw up risk mitigation and portfolio diversification
strategies that maximize risk-adjusted returns.
They are relevant for retail investors also, as the
findings offer opportunities to them to earn higher
returns through suitably designed trading strate-
gies. The study is equally relevant for academicians
and researchers as they could take cue from the
study to investigate related aspects, such as explor-
ing the reasons for sharp fall in Nifty futures
volumes at CME and the likely impact of introduc-
ing Nifty Futures on additional exchanges abroad,
particularly in the Asian region. More importantly,
future research could extend the study of Indian
equity markets to cover the more recently intro-
duced Nifty options internationally; explore the
information transmission patterns for equity mar-
kets in other emerging economies to determine
whether they are similar to those observed for India;
examine the same also for advanced economies, to
identify deviations from patterns for emerging
economies; as well as investigate the information
transmission patterns for other financial markets,
such as commodity and currency markets, both in
India and abroad. The study contributes to the
information transmission literature for emerging
markets.
Acknowledgments The Authors wish to sincerely and
gratefully acknowledge with thanks the Editor-in-Chief and
the Reviewer for their valuable inputs and suggestions which
have helped to improve the quality of the Manuscript.
Appendix 1
See Table 6.
Decision (September 2016) 43(3):239–258 255

Table 6 Nifty Index spot and futures volumes at NSE, SGX, CME and OSE during 2010–11 to 2014–15 Source: Bloomberg
2010–11 2011–12 2012–13 2013–14 2014–15 Total (in million)

NSE_S 40483562172 38682804007 34286642297 42271242745 3.893E?10 194655.53

NSE_F 115767945 98492439 58206319 64360290 81582832 418.41
SGX_F 8468787 10739529 10231504 11718032 14143716 55.30
CME_F 158190 27266 1531 7 0 0.19
OSE_F* 2055 2055
Year-wise volumes are given in terms of number of contracts traded, and the total number of contracts during 2010–2015 (last
column) is given in millions of contracts
NSE_S and NSE_F denote Nifty Index spot and Nifty futures traded on NSE, India; SGX_F refers to Nifty futures traded on SGX;
others are interpreted in same manner
* Nifty futures were introduced at OSE on 24 March 2014

Appendix 2

See Table 7.

Table 7 Major contract specifications including trading hours and trading costs of Nifty futures at NSE, SGX, CME and OSE
Source: Websites of respective Exchanges of concerned countries and Bloomberg
Exchange Contract Contract month/s Contract size Tick Trading hours (local Trading costs
size hours)

National CNX Nifty 3 nearest serial 25 0.05 Monday to Friday SEBI turnover fees—
Stock Index months (3 monthly INR 9 Index index 9.15 a.m.–3.30 p.m. 0.0002 % of the price at
Exchange futures cycle)—near point (6 h, 15 min) which securities are
(NSE) month (one), next (INR purchased or sold Stamp
month (two) and 1.25) Duty of 0.01 % on value
far month (three) of shares transferred in
cash market, and
0.002 % for derivatives
segment (in
Maharashtra) Service
Tax—12.36 % levied on
brokers, who charge the
clients—but is exempted
if services are partly
performed outside India
and payment received in
convertible foreign
exchange within 6
months; STT—0.017 %
till 31 May 2013 and
0.010 % thereafter, on
sale of futures in
securities, to be paid by
seller. Initial margin
based on 99 % VAR
over two-day horizon;
exposure margin is 3 %
of notional value of
futures contract; at least
50 % of collateral
deposits should be in the
form of cash

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Table 7 continued
Exchange Contract Contract month/s Contract size Tick Trading hours (local Trading costs
size hours)

Singapore SGX CNX 2 nearest serial USD 0.5 Monday to Friday Brokers’ Commission,
Exchange Nifty months and 4 2 9 Index index T session: 9:00 SGX clearing fee and
(SGX) Index quarterly months point a.m.–6:10 p.m. Trading fees
futures on March, June, (USD Maintenance Margin (as of
(9 h, 10 min)
September and 1) 21 Jul 2014)—$450;
December cycle. T ? 1 session: 7.15
Initial margin—$495;
p.m.–2.00 a.m.
Additional margins also
(6 h, 45 min) applied, usually to
contracts that are
physically settled
Chicago E-mini 2 nearest serial and 4 USD 0.5 Sunday–Friday: Clearing and Globex fee -
Mercantile CNX quarterly (March 2 9 Index index 5 p.m.–4 p.m. $0.35 per side; Clearing
Exchange Nifty quarterly cycle— point (Chicago Time); 6 fee: $0.09 for individuals
(CME) Index March, June, (USD p.m.–5 p.m. (NY and firms; Globex fee:
Globex futures September, 1) time); $0.26 for individuals and
December) firms; On a tiered basis,
Trading halts (Sun–
Clearing and Globex
Thurs): 8.30 p.m.–
fees are reduced for
9.30 p.m.
trading volumes
(Chicago Time)/
exceeding designated
9.30 p.m.–10.30
average daily volume
p.m. (NY Time)
thresholds; Brokerage
Daily maintenance fee is charged per
period (Mon– contract; Maintenance
Thurs): 4 p.m.–5 Margin: USD 700; Initial
p.m. (Chicago margin—110 % of
Time)/5 p.m.–6 maintenance margin for
p.m. (NY Time) speculative/non-
members, and 100 % of
maintenance margin for
hedger/members.
Osaka Osaka Three nearest serial 100 1 index Monday–Friday Clearing fees—5 Yen per
Exchange Exchange contract months Yen 9 Index point Day session: 9 trading unit; Trading
(OSE) S&P CNX (100 a.m.–3.10 p.m. fees: volume 9 JPY 40
Nifty Yen) per trading unit for each
Night session: 4.30
Index sale or purchase; Trading
p.m.–2.55 a.m.
futures participant basic
monthly fee—JPY
600,000; Give-up fees:
volume pertaining to
give-up 9 JPY 5;
Cancellation fees for
erroneous order = JPY
40; Position transfer
fees: position
transfers 9 JPY 5;
Trading participation
fees = JPY 50 million

123
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