Price Discovery Behavior of Spot and Futures : Evidence from Pre- and Post-Crisis Periods

The study attempts to examine if there is any shift in the price discovery behavior of spot and futures markets between pre-crisis period and post-crisis period. All those stocks which are available for trading in futures segment since the launch of futures trading on November 9, 2001 to December 31, 2018 have been considered for the purpose of the study so as to understand the behavior of the stocks in price discovery process in pre-crisis, crisis and post-crisis periods. To measure the price discovery effects, the study uses Johansen’s cointegration and Vector Error Correction Model (VECM), as it helps in investigating which market (spot or futures) leads in discounting the potential value of the information. The study also applies Hasbrouck’s information share approach to investigate the proportion of contribution of each market to price discovery. The results indicate that there is evidence of futures market leading spot market during pre-crisis period. However, the leading role of futures disappeared during the crisis period. It may be attributed to the fear of market participants to trade in high levered instruments. Rather, there is evidence of leading of spot market during the crisis period and also after the crisis period. On the whole, it is observed that spot market plays a dominant role in price discovery as against the general premise that futures being low-cost instruments lead in price discovery. This phenomenon may be attributed to relatively low participation of informed institutional investors in Indian futures segment