An analytical study of equity derivatives traded on the NSE of India

Abstract

To analyze day trading dynamics for Nifty Index futures and options contracts, a detailed study is steered to understand the quantum of volume traded and how volume traded affects the underlying volatility. Day trades are about 30% and 46% of the total trades for futures and options contracts, respectively. This signifies high volatility. Volume traded by individuals is bulk compared to other categories for both intraday and non-day trades. This study estimates the volatility volume dynamics. Volatility is assessed by the minimum-variance unbiased estimator. This method, independent of the drift and opening jumps, provides estimates of the least variance for more accuracy. Volume is segmented into a number of trades and average trade size. To understand the effect of volume, trade size and inventory on volatility, we use the logit regression function. For non-day Nifty Index futures contracts, low volumes are traded as opposed to high volumes for day trades, suggesting high speculative activity. For options contracts, the volume volatility estimates although significant are weak compared to futures contracts.

Keywords

• Nifty Index futures
• Nifty Index options
• Day trades
• volatility volume relation
• logit regression