Essays on Indian derivatives market’s efficiency

Guide(s)

Basu, Sankarshan

Department

Finance and Accounting

Area

Finance and Accounting

University

Indian Institute of Management Bangalore

Place

Bangalore

Publication Date

3-31-2026

Year Awarded

March 2026

Year Completed

March 2026

Year Registered

June 2019

Abstract

This dissertation empirically investigates the efficiency of the Indian derivative market,using the mispricing of NSE Nifty 50 index futures as a measure of market efficiency. Inthis research, I have examined the impact of market volatility, contract maturity, andsignificant regulatory changes on pricing efficiency and arbitrage opportunities in themarket. I have utilized data from the National Stock Exchange (NSE) between 2016 and2024 for this purpose.My first essay examines the relationship between expected market volatility, as proxiedby the India VIX, and mispricing of Nifty index futures. The findings suggest that apositive relationship exists, but it is most pronounced during periods of abnormally highvolatility, such as the COVID-19 pandemic. During periods of normal volatility, the relationship is less pronounced, with underpriced contracts exhibiting greater sensitivity tochanges in volatility than overpriced ones.In the second essay, I explore the impact of the time to expiration for the futures contractson mispricing. The analysis reveals that although the absolute magnitude of mispricingconverges toward zero as a contract nears its expiration date, the convergence is nonlinear. When standardized on an annualized basis, the potential arbitrage returns aresignificantly higher for contracts closer to expiry. My study also finds that market volatility has a statistically significant impact on mispricing in the final week before expiration,presenting economically significant opportunities for arbitrageurs and crucial insights forinvestors managing their rollover strategies.In the third essay, I evaluate the structural impact of the Securities and Exchange Boardof India’s (SEBI) Peak Margin regulations, which were implemented between 2020 and2021. The results show a fundamental shift in market dynamics. Post-regulation, Niftyfutures shifted from being frequently underpriced to predominantly overpriced. This shiftcoincided with a significant change in market participation, marked by a decline in retailinvestor activity and an increase in proprietary trading. Consequently, the relationshipbetween volatility and mispricing inverted; in the post-regulation period, higher volatilityis associated with a reduction in mispricing, suggesting increased efficiency from algorithmic trading during volatile periods.Overall, my thesis contributes to the understanding of derivatives pricing in an emergingmarket context, highlighting how volatility, contract life-cycle, and regulatory interventions shape market behavior and efficiency. It should also aid in all policy discussions onderivatives margin regulations in market setups such as India.

Pagination

ix, 103p.

Copyright

Indian Institute of Management Bangalore

Document Type

Dissertation

DAC Chairperson

Basu, Sankarshan

DAC Members

Thampy, Ashok; Anand, Abhinav

Type of Degree

Ph.D.

Relation

DIS-IIMB-FPM-P26-01

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