Vol. 1, Issue 1, Part G (2014)

Abstract
The current study uses the daily returns of five IT companies from April 1, 1998, to March 31, 2008, excluding holidays when no transactions occurred, to investigate the impact of equity derivatives trading on spot market volatility, specifically the impact of equity derivatives introduction on spot market volatility in the Indian stock market. The GARCH (1, 1) model that captures the heteroscedasticity in returns has been applied to study market volatility. However, all the companies under study showed asymmetric response and, accordingly the GJR GARCH model that captures the asymmetric response has been applied by using CNX Nifty index return as the independent variable in order to remove the influence of market-wide factors on equity returns. The results indicate that the coefficient of the dummy variable is significant and negative. Thus, it can be said that introduction of equity derivatives trading has reduced spot market volatility.