The Impact of Derivative Trading on Spot Market Volatility: Evidence for Indian Derivative Market

The impact of derivatives trading on the underlying stock volatility, and its characteristics, is still debated both in the economic literature and among practitioners. The aim of this study is to analyse the effect of theintroduction of derivatives on the volatility of the Indian stock exchange. This study mainly addresses two issues: first, the study analyses the stock market volatility in the pre and post derivative period and Secondly, whether the `derivatives effect’, if confirmed, is immediate or delayed. The results show that some of the stocks experienced changes in the structure volatility after implementation of derivatives and experiencing a stronger persistence of volatility in comparison to pre derivative period. Most of the stocks became disintegrated with market benchmark index after introduction of derivatives.