Time to maturity and volume effects on volatility: Evidence from NSE futures market

Abstract

The study empirically examines the relationship between time to maturity and price volatility in NSE futures market by employing GARCH framework. It also investigates 'Mixture of Distribution Hypothesis' which is based on the relationship between futures price volatility and volume. For the analysis, data on daily closing pricing of Nifty Futures, volume and open interest are collected for the period from 4th July, 2003 to 28th, November, 2012. Besides, the study has chosen 10 individual stock futures and collected their daily closing price, volume and open interest data. The study uses near-month contract data as most trading activities have taken place in near-month contracts. The study considers open interest and volume as measures of futures trading activity. In the GARCH model for the NSE futures market the coefficient of the time-to-maturity variable is found to be insignificant, implying that time-to-maturity does not impact volatility in this market. Further the results strongly support 'Mixture of Distributions Hypothesis' in the NSE futures market. The study finally concludes that a future trading volume is a significant determinant of futures price volatility while time-to-maturity is not.