Single stock futures in India

Abstract

Single Stock Futures (SSFs) is a standardized futures contract on an equity exchange listed stock. SSFs, like any other derivatives contract are used to hedge risk, speculate, invest, engage in arbitrage and to provide liquidity. SSF vs other derivatives: Even though advanced derivatives such as options are available on the underlying stocks, SSFs continue to be popularly traded investment vehicles. This is largely attributed to factors such as simplicity of contracts, ease of interpretation for taking long/short decisions as the futures prices closely follow the underlying price and no requirement for contract premium. In addition, while arbitrage opportunities rarely exist in options space, forward and reverse arbitrage are extremely common forms of arbitrage in equity futures market. World Markets: Europe, Africa and Middle East constituted nearly 70% of the volume SSF traded in 2011. SSFs are found to be particularly popular in India with the National Stock Exchange ranking high in terms of number of trades (1st), Volume traded (5th) and Notional Traded (2nd). Statistical Analysis: Logist regression on stocks listed as underlying indicates that stocks that are large cap, and essentially members of leading stock indices (in this case BSE 100 or Nifty50) are the ones selected for futures underlying. Statistical tests carried out on NSE stock and futures data supports the hypothesis that introduction of single stock futures leads to lower market returns for the underlying equity. In other words, absence of futures indicates an upward bias on stock prices.