Study on the effect of non-price variables of open interest and trading volume, National Stock Exchange of India Limited (NSE) derivatives market on the future stock prices

Abstract

Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. Since then, derivatives market in India has witnessed tremendous growth in terms of trading value and number of traded contracts. In 2010-2011 alone, the numbers of contracts recorded on NSE were over 1 billion with the turnover of 115150.48 crores. The introduction of the options market enabled informed traders as well as liquidity traders to have an additional means of meeting their trading needs. Robust interaction between option and cash market can result in transmittal of information from one market to another and thus is mutually beneficial resulting in better price discovery. The purpose of the study is to provide a comprehensive review of the empirical literature in the area of interaction between option and underlying asset market. There is considerable academic discussion relating to the dynamics of the interaction between stock and option markets. However, several conflicting results were obtained. It is important to carefully understand the variables under which the study was conducted, before implementing it in a trading strategy. This study in short, examines the informational efficiency of factors like open interest and trading volume in predicting underlying stock prices.