Domestic and international information linkages between NSE Nifty spot and futures markets: an empirical study for India

Abstract

This paper examines the information linkages between NSE Nifty Index spot and futures in India and Nifty futures traded on international platforms from August 2008 to March 2015. We find 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, OSE and CME. This confirms that NSE is the dominant platform for Nifty trading, while the international exchanges act as satellites. The information path for transmission of Nifty price signals brings out geographical proximity, trading costs, trading hours, information access and currency denomination of Nifty futures contracts at individual exchanges as major factors for the lead–lag relationships. Short-term volatility spillover path is from Nifty spot to futures on NSE, and NSE leads two of the three international counterparts (SGX and OSE). No significant long-term volatility spillovers are observed domestically as also internationally, except bilateral information transmission between NSE and SGX. The dominance of NSE Nifty spot suggests that hedgers play an important role in both price discovery as well as risk hedging. These findings are relevant for policy makers, portfolio managers as well as the academic community.