An Empirical Analysis of Price Discovery and Causal Relationship Between Futures and Spot Market in India

Abstract

The derivatives market has witnessed many positive experiences over the cash market, and it is leading to the price discovery process. It signifies that the price movements in the derivative segment strongly influence the cash market and that the cash market follows the derivative market for price determination. The price discovery happens in the derivative segment which is one of the functions of the derivative market. Both the futures and spot markets try to maintain equilibrium whenever disequilibrium occurs between the spot and futures market. Nifty IT futures and spot prices exhibit short-run relationship; whenever disequilibrium occurs in the co-integrated series, it is the futures market that makes greater adjustments in order to re-establish the equilibrium.