An Analysis of the performance of popular stocks in Cash market and Futures Market

The introduction of derivatives segment from the early 2000s onwards has led both to interactions between the spot and futures markets, and to an interest by regulators in controlling any possible harmful influences of this new trading segment. The Individual Stock Futures (ISF) segment is of phenomenal success on Indian bourses and NSE is consistently ranked number one in world ISF segment, even in the absence of strong stock lending mechanism. It is expected that the futures prices can reflect additional information, over and above that already reflected in the spot price, given the leverage benefits and so can serve as a leading indicator for the spot price. The majority of prior studies on Price Discovery and Arbitrage examine the temporal relationship between a futures and its underlying cash market. The basis for these studies is that in perfectly efficient futures and cash markets, informed investors are indifferent between trading in either market, and new information is reflected in both simultaneously. Accordingly, the contemporaneous returns of the two markets would be perfectly correlated, whereas non-contemporaneous returns would be uncorrelated. The majority of empirical evidence, however, has documented some mis-pricing between the futures and cash markets, with the consensus view that futures generally lead cash markets. In this paper, we will find the impact of movement in cash market and future market on the performance of the stocks of some well renowned companies. Within the arbitrage bounds, the change in basis can affect prices in both markets and a significant feedback relationship between futures and cash markets is noted. Besides, price discovery is not evident in the futures markets due to almost the same speed of information flows in both markets. While outside the arbitrage bounds, the influence of the change in basis on both futures and cash indexes is statistically insignificant and the change in the futures price leads the cash price, thereby indicating notably the function of price discovery in the futures market. Key words-Leverage, Price Discovery, Arbitrage, future and cash indexes and Indian Stock Futures I. Introduction Understanding the influence of one market on the other and role of each market segment in price discovery is the central question in market microstructure design and of utmost importance to regulators and academia. Price discovery is an important function of the exchange and it hints at where do informed traders trade. More precisely, following Schreiber and Schwartz (1986), Price discovery is the process by which markets attempt to find their fair prices. If the markets are efficient and frictionless, then price discovery should be instantaneous and contemporaneous. In practice, between spot and derivatives segments or across different trading venues of the same stock, price discovery takes place in one