Effect of the Launch of Nifty Weekly Options on the Relationship between Nifty and India VIX

Abstract

This paper examines the impact of the introduction of weekly expiry on Nifty options on the relationship between Nifty and India VIX. It demonstrates that the introduction of weekly expiration on Nifty options resulted in a significant decrease in the association of market returns and volatility. This decrease was visible across options-based volatility metrics like India VIX and non-options-based volatility metrics like Annualized Volatility of Futures and Underlying asset (Nifty Index). This study finds that shorter expiries and resultant larger volumes lower the correlation between market performance and various volatility indicators. This is done by testing the effect of Nifty volumes in the Options segment as a moderator variable in the relationship between Nifty and India VIX. In other words, an increase in India VIX now indicates a lower decline in Nifty than it did earlier. This paper also indicates that the inverse must also be true. Longer expiries and comparatively lower volumes contributed to a higher negative correlation between Nifty and India VIX. By comparing correlations in the periods before and after the introduction of weekly expiry on Nifty options, we measure the impact of volumes and expiration time.