Does the Nature of Index and Liquidity Influence the Mispricing in Future Contracts in India?
Abstract
In this study, we investigate the variations in the mispricing of futures in Nifty (benchmark index), Bank Nifty and Nifty IT. Using a regression model on 1230 observations for the period of 1 January 2014 to 31 December 2018, we find no significant mispricing exists in the last week to the expiry of the contract in all three indices. This finding supports the existing literature that as the contract moves towards the maturity date, its value converges the market value. However, the main highlight of the paper is to reveal the difference in the life of mispricing in different indices. This difference in mispricing can be allocated to the liquidity in that indices. We report that being the most liquid, Bank Nifty is having mispricing only in 1 week (first week) of the contract, after that no significant mispricing exists in mispricing, Nifty shows significant mispricing for the first two weeks and Nifty IT shows mispricing for all weeks except last week. This is the pioneering work which considers the sectoral differences while evaluating futures mispricing. The findings of this study will provide a useful insight to the regulator and investors.
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Copyright (c) 2020 Deeksha Garg
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