Effect of futures trading on the stability of stock index returns: a case of BSE Sensex

This paper attempts an to investigate the effect of futures trading on the stability of returns on BSE Sensex by using daily observations from January 1996 to December 2007. Three statistical tests namely, Kolmogorov Smirnov 2-sample test, Wilcoxon Rank Sum test and Goldfeld Quandt tests are used. The study found that higher volatility of daily returns in post-futures period than in the pre-futures period but the volatility of monthly returns remained unchanged. Apart from the months May 2004 and May 2006, there is no evidence that monthly BSE Sensex volatility has increased after inception of the Futures trading.