Perception of Recognized Intermediaries about Equity Derivative Market in India Dr. Ravi Kumar Gupta 1, Dr. Shalu Juneja 2, Megha Banga 3, and Dr. Anita Gupta 4 1 (Professor, Department of Management Studies, Maharaja Agrasen Institute of Technology, Delhi, India) 2 (Assistant Professor, Sh. L N Hindu College, Rohtak, Haryana, India) 3 (Research Scholar, IMSAR, Maharshi Dayanand University, Rohtak, Haryana, India) 4 (Department of Mathematics, Vaish College of Engineering, Rohtak, Haryana, India) Abstract: The Present study is aimed to gauge the perception of Recognized Intermediaries of about the efficiency of Equity Derivative Market in India; quantitative primary data was gathered through sample survey method. In the Survey, Questionnaire has primarily been used as a major tool to collect the required information from the Recognized Intermediaries. It is found that more than 74 percent of the brokers are having more than 5 years of experience in equity derivative market as a broker, 44 percent are having more than 10 years of experience, however only 17 percent of brokers are found to have experience of less than 3 Years. Only 4 percent out of the total brokers found to have experience less than a year. It is found in the study that there exist no significant association between the type of the trading member and their risk perception towards different derivative instruments available in the capital market. I. INTRODUCTION Understanding volatility in emerging capital markets is important for determining the cost of capital and for evaluating direct investment and asset allocation. Volatility in the stock return is an integral part of stock market with the alternating bull and bear phases. In the bullish market, the share prices soar high and in the bearish market share prices fall down and these ups and downs determine the return and volatility of the stock market. Pricing of securities depends on volatility of each asset. An increase in stock market volatility brings a large stock price change of advances or declines. Asset price fluctuations may potentially impair financial market stability. Stock prices volatility has received a great attention from both academicians and practitioners over the last two decades because it can be used as a measure of risk in financial markets. Over recent years, there has been a growth in interest in the modeling of time-varying stock return volatility. II. REVIEW OF LITERATURE Spyrou (2005) examined whether the introduction of derivative instruments stabilizes or destabilizes markets for underlying assets. Study used closing prices for the two main market indices (FTSE/ASE -20and ASE General price Index and it covered the period between September 1997 to September 2003.Study investigated the issue for a dynamic emerging market, the Athens Stock Exchange, employing a GARCH (1, 1) methodology that allows the examination of changes in the nature of volatility rather than changes in volatility per se, and allowing for asymmetric responses to news. To anticipate the results, spot volatility appears unaffected with some evidence to suggest that uncertainty is actually reduced following the introduction of futures trading. Khan (2006) focused on the role of the financial futures market in the volatility of Pakistan s stock market and determines whether the stock futures price is capable of providing some relevant information for predicting the spot price. The Study covered the period of January 1, 2003 to December 9, 2005 for futures contract. Researcher used the time series of daily closing value of the Karachi Stock Exchange (KSE-100) Index and the daily total nominal value of the futures contracts traded on the KSE-100 Index. Empirical results supported the evidence that spot prices generally lead the futures prices in incorporating new information, and that volatility in the futures market does not increase volatility in the spot market. Rather the study found more consistent support for the alternative hypothesis that volatility in the futures market may be an outgrowth of the volatile spot market Alexakis (2007) investigated the effect of the introduction of Stock Index Futures on the volatility of Spot Equity Market. The Study comprised daily closing observations of Spot Stock Index rate from 23 rd September 1997 to 7 th June 2004.To test the impact of the introduction of Stock Futures Contract, a GARCH Model is modified along the lines of GJR-GARCH Model especially to take into account the link between information and volatility. Results indicated that index of Future trading is fully consistent with efficient Market operation as it exerts a http://indusedu.org Page 48
stabilizing effect in spot Market,reducing volatility asymmetries and improves the quality and speed of flow of information. Debashish (2008) aimed to study the impact of the introduction of Nifty index futures on the volatility of the Indian spot markets using data from April 1997 to April 2007. The study considered six measures of volatility, dynamic linear regression models and the GARCH models to investigate volatility in NSE Nifty prices, both before and after the onset of futures trading. The study confirmed no structural change after the introduction of futures trading on Nifty and found that, whilst the pre-futures sample was integrated, the post-futures sample was stationary. Spot returns volatility is found to be less important in explaining spot returns after the advent of futures trading in NSE Nifty. Hsueh, Liu & Lee (2008) focused on futures trading activities for hedgers and speculators and examined the dynamic relationship with the timing and source of information arrival, such as the trading-hours and nontrading-hours volatility. Findings suggested that, the return volatilities react more consistently to the lagged trading activities for hedgers and speculators, separately. Our results indicated the existence of a positive relationship between volatility and futures trading for trader-types under examination of information while markets are open or close. Additionally, a causal relationship between volatility and futures trading seems to be found although the direction of causality seems to differ depending on the market under investigation for different information and trader-types. Sakthivel (2008) investigated the impact of introduction of index futures trading on volatility of Nifty. The main data for the study is returns of the S&P CNX Nifty and Nifty index futures. In order to estimate the impact of the introduction of index futures trading on the volatility of the Nifty daily closing prices returns of the NSE 50 index is collected during the period January 3, 1992 to 31stmay, 2007. The study employed GARCH (1, 1) model to capture the time varying nature of the volatility and volatility clustering phenomena using daily closing price of the Nifty. The results showed that after introduction of the futures trading reduced stock market volatility, due to increase market efficiency. Debasish (2009) investigated the effect of Future trading on the volatility and operating efficiency of the underlying Indian Stock Market by taking a sample of selected Individual Stocks. The effect of the introduction of Future Trading is examined using an extended period of June 1995 to May 2009.The Study examined whether the Index Future trading in India has caused a significant change in spot price volatility of the underlying stock and how the Index Future trading has affected Market efficiency in the Indian Futures and Stock Market. Study employed a Event Study approach to test whether the introduction of Index Futures Trading has resulted in significant change in volatility and efficiency of the Stock returns. Result also suggested that there is tradeoff between gains and costs associated with the introduction of Derivative trading at least on a short term perspective. Result also suggested that the market would have to pay a certain price such as a loss of market efficiency for the sake of market stabilization. Gupta & Singh (2009) examined the impact of Equity Futures and option trading on Indian Cash market Volatility.For this purpose, behavior of volatility of NIFTY has been examined over a sample period January 1997 to June 2006.Study employed GARCH(1,1)Methodology Conditional Volatility in NIFTY has been observed to significantly decline in the market wide volatility of NIFTYJUNIOR establishes that such decline is in line with decline in market wide volatility. Results showed that Future and Option trading have led to decline in volatility which is consistent. Singla (2012) compared the volatility in the periods of pre and post introduction of index derivative contracts by computing the rolling standard deviations and the variances in the daily return data of S&P CNX Nifty Index over different period event windows.. The data used for the study was the daily closing values of S&P CNX NIFTY Index for the period June 14, 1999 to June 3, 2002. The variances in daily returns were computed for an event window of 20, 50, 100 and 200 days before and after the introduction of index futures. Assuming the normality of return distribution the F statistic is used to compare the variances. The Research compared the rolling standard deviation and the variances in the daily return data over different period event windows in the pre and post periods of introduction of derivative contracts it is evident that there has been significant decline in the unconditional volatility in the daily returns data of underlying asset. Chen & Zhang (2015) analyzed the impact of stock index futures on the stock market by using CSI 300 index. The data used in the study was selected from April 16, 2010 to December 31, 2014. The result shows that the stock index futures not significant effects on the volatility of spot market; however, there exist a co integration relationship in both long term and short term. Granger causality analysis shows that the stock index future is not Granger cause to CSI 300, while the CSI 300 is Granger cause stock index futures. Mamtha & Srinivasan (2017) studied that Indian derivatives market has revolutionized with innovative financial products become high net worth market over the years and earned well deserved and efficient platform for http://indusedu.org Page 49
the investors to invest from across the world. It is found in this paper that the investors are highly influenced by various factors invest in derivatives market depending upon their risk aptitude. Despite a disagreement of the Researchers regarding the kind of influence that the market of futures has on the underlying spot Market, Most of them agree that it is beneficial even if the volatility is increased or decreased because the Futures Market acts as a catalyst for the dissemination of information. BRICS (Brazil, Russia, India, China and South Africa) countries have become vital sources of growth in the global economy. There is a lot of importance being associated with BRICS nations in the recent past saying that they are going to be the next super powers in the world markets by 2050 (Goldman Sachs report). These five countries have quite different backgrounds and each of them are growing with the almost the same pace with differing strategies. III. RESEARCH METHODOLOGY As the primary objective of study is aimed to gauge the perception of Recognized Intermediaries of about the efficiency of Equity Derivative Market in India, quantitative primary data was gathered through sample survey method. Questionnaire has been developed and administered amongst the recognized Intermediaries whose registered office is based at different parts of India. The questionnaire was developed based with the help of experts' opinion and an existing survey on derivatives in Indian securities Market. The survey was conducted mainly with the objective of understanding the Derivative Market from the perspective of Recognized Intermediaries In the Survey, Questionnaire has primarily been used as a major tool to collect the required information from the Recognized Intermediaries. IV. DATA ANALYSIS AND INTERPRETATION Duration of dealing in Financial Market The Brokers were asked to respond about the duration of dealing in Financial Market in order to study the level of experience they have in the Financial Market. The results of broker s response are shown with the help of frequency distribution along with graphical representation. Table1: Frequency distribution Duration of dealing as broker in financial market Frequency Percent less than a years 3 4 % One to three years 10 13 % Three to five years 7 9 % Five to ten years 24 30 % More than ten years 35 44 % Total 79 100 % The results of frequency distribution indicate that more than 74 percent of the brokers are having more than five years of experience in equity derivative market as a broker, 44 percent of the brokers are having more than 10 years of experience. However, only 17 percent of brokers are found to have experience of less than 3 years. Only 4 percent out of the total brokers are found to have experience less than a Year. Type of Category Member of Stock Exchange In Equity Derivative Market, Members can be classified into four types of Categories i.e. Trading Member, Trading Cum Clearing Member, Professional Clearing Member and Self Clearing Member. In this Study the data is collected from all the categories and their division according to their profile is shown with the help of Frequency distribution and graphical representation. In this primary study, the respondents were asked to respond their category http://indusedu.org Page 50
with respect to their registration with the Stock Exchanges. The Response of the Brokers of their Membership Category is shown in the Table 2 below Table: 2 Membership Type Type of category member Frequency Percent Trading member 13 16.50 Trading Member cum Clearing Member 56 70.90 Professional Clearing Member 8 10.10 Self Clearing Member 2 2.50 Total 79 100.00 The Results shows the details of categorisation of the respondents. Results indicate that most of the members are fall under the category of trading member cum clearing Member. Almost 70percent of the respondents were in the Trading cum clearing member category, Professional clearing Member formed 10.10 percent and only 2.5 percent is found to be in Self clearing Member category. The Representation of Self Clearing Member and Professional Clearing members was extremely low as they were only 2 and 8 members in this category as on 31 December 2015.The maximum of the trading was done by the Trading member Cum Clearing member. Perception of Respondents which carries highest risk carrying Instrument The Respondents were asked about their perception of highest risk carrying Derivative Instrument while trading in the Financial Market. Every Financial Instrument carries some risk but with different proportion. The intention of this question is to find out the perception of the respondents carry highest risk with these financial instruments. The Perception of the Respondents with respect to their Risk carrying Instrument is shown with the help of Frequency Distribution along with the graphical representation in Table 3. Table 3 Highest risk carrying Derivative Instrument Frequency Percent Equity 18 22.8 % Commodity 23 29.1 % Currency 22 27.8 % Interest Rate 16 20.3 % Total 79 100 % http://indusedu.org Page 51
Type of category member Dr. Ravi Kumar Gupta et al., International Journal of Research in Engineering, IT and Social Sciences, The Results indicates that Respondents perceive Commodity and Currency as a highest Risk carrying derivative Instrument in the Financial Derivative Market.29.1percent of the Respondents agree that Commodity serve as a highest risk carrying Instrument in the Financial Market preceded by the Currency Derivative market.as 27.8percent of the Respondents perceive Currency Market as a Volatile Market and they perceive it as a Risky Instrument. However Respondents perceive Equity Derivative and Interest rate as less Riskier Instrument as they showed 22.8 percent and 20.3percent respectively as compared to Commodity Market and Currency market. Association between the category of Members and their perception about highest risk carrying derivative Instrument In this Research study the effort is done to analyse the association between the type of the trading member and their perception about highest risk carrying derivative instrument. The primary data is collected from the four types of the members these trading members were asked to respond the most risk carrying derivative instrument in their perception. The Chi square test was applied in order to test the following null hypothesis. Null Hypothesis: There exists no significant association between type of trading members and their perception about the highest risk carrying derivative instrument. Perception about highest risk carrying derivative Instrument Trading member Observed (Expected ) Trading Member Observed cum Clearing (Expected ) Member Professional Observed Clearing Member (Expected ) Self Clearing Observed Member (Expected ) Column Total Highest risk carrying Derivative Row Instrument Total Equity CommodCurrenc Interest ity y Rate 8 (3.8) 13 (16.3) 1 (2.6) 13 (11.3) 2 (3.6) 16 (15.6) 2 (3.0) 14 (12.8) 13 56 1 (2.3) 2 (1.6) 4 (2.2) 1 (1.8) 8 1 0 0 1 2 (.6) (.4) (.6) (.5) 23 16 22 18 79 Chi Square Cramer s Statistics Statistics 12.328 (0.195) 0.228 (0.195) In the research study, the respondents were asked to share the perception about the most risky instrument in the market Among provided in the question about the Equity, Commodity, Currency and Interest rate Instruments, the cross tabulation is estimated between the risk perception and category of exchange members, the chi square test is also applied in order to test the hypothesis. The results of the chi square indicates that probability value of chi square statistics is found to be more than 5% level of significance.hence with 95% confidence level the null hypothesis cannot be rejected. Hence it can be concluded in the study that there exist no significant association between the type of the trading member and their risk perception towards different derivative instruments available in the capital market. http://indusedu.org Page 52
V. CONCLUSION In the research study the brokers were asked to respond about the duration of their experience of dealing in financial Market. It is found that more than 74 percent of the brokers are having more than 5 years of experience in equity derivative market as a broker, 44 percent are having more than 10 years of experience, however only 17 percent of brokers are found to have experience of less than 3 Years. Only 4 percent out of the total brokers are found to have experience less than a year. It is found in the study that there exist no significant association between the type of the trading member and their risk perception towards different derivative instruments available in the capital market. VI. REFERENCES [1] Alexakis, P. (2007). On the Effect of Index Futures Trading on Stock Market Volatility. International Research Journal of Finance and Economics, 11, 7-20. [2] Chen, X., & Zhang, N. (2015). An Empirical Study of China s Financial Stock Index Futures Effect on Stock Spot Market Based on CSI 300. International Journal of Multimedia and Ubiquitous Engineering, 10 (1), 407-416. [3] Debasish, S. S. (2008). Effects of Futures Trading on Spot Market Volatility: Evidence for NSE NIFTY using GARCH. Afro- Asian Journal of Finance & Accounting, 1(2), 140-150. [4] Debasish, S. S. (2009). An Empirical Study on Impact of Index Futures Trading on Spot Market in India. KCA Journal of Business Management, 2(2), 35-51. [5] Debasish, S. S. (2009). Effect of Futures Trading on Spot-Price Volatility: Evidence for NSE NIFTY using GARCH. The Journal of Risk Finance, 10(1), 67-77. [6] Gupta, K. & Singh, B. (2009). Investigating the Impact of Equity Futures and Options Trading on Indian Cash Market Volatility. Indian Management Studies Journal, 13, 1-11. [7] Hsueh, P. L., Liu, Y. A. & Lee, N. R. (2008). The Dynamic Relation of Volatility and Futures Trading under Market Conditions and Changing Sentiments. International Research Journal of Finance & Economics, 20, 151-163. [8] Khan, S. U. (2006). Role of Futures Market on Volatility and Price Discovery of the Spot Market: Evidence from Pakistan's Stock Market. The Lahore Journal of Economics, 11(2), 107-121. [9] Mamtha, D. & Srinivasan, K. S. (2017). Indian Derivative Market: Investors Risk Perspective. International Journal of Economic Research, ISSN : 0972-9380, Volume 14, Number 14, 45-58. [10] Spyrou, S. I. (2005). Index Futures Trading & Spot Price Volatility: Evidence from an Emerging Market. Journal of Emerging Market Finance, 4(2), 151-167. [11] Sakthivel, P. (2008, January 18-19). The Effect of Futures Trading on the Underlying Volatility: Evidence from Indian Stock Market. Paper Presented at the 10 th Money and Finance Conference, Indira Gandhi Institute of Development Research, Mumbai. http://indusedu.org Page 53