Title: Intraday price discovery in Indian stock index futures market: new evidence from neural network approach

Authors: Saurabh Kumar; Sarveshwar Kumar Inani

Addresses: Information Technology and Systems Area, FPM-22, Indian Institute of Management (IIM), Lucknow, Prabandh Nagar, Lucknow, PIN 226013, Uttar Pradesh, India ' Finance and Accounting Area, FPM-5, FPM Hostel, Indian Institute of Management (IIM), Lucknow, PIN 226013, Uttar Pradesh, India

Abstract: Using neural network approach, this study revisits the price discovery relationship between spot and futures prices of S&P CNX Nifty Index of India. This study uses minute-by-minute data of 167 trading days (from January 2015 to August 2015). Empirical results reveal that there exists a bi-directional lead-lag relationship between spot and futures markets, but the causality from the spot market to the futures market is more dominant as compared to that of running from the futures market to the spot market. Root mean squared error of the results indicates that the incorporation of spot returns in modelling futures returns improves the results by 62.37%. Whereas, the inclusion of futures returns in modelling spot returns improves the model by only 44.60%. Price discovery dynamics has significant implications for market participants, regulators, and exchanges. These findings could be helpful for portfolio management, market structure design, and the implementation of arbitrage and hedging strategies.

Keywords: price discovery; futures market; intraday data; India; market microstructure; neural network.

DOI: 10.1504/IJFMD.2017.086743

International Journal of Financial Markets and Derivatives, 2017 Vol.6 No.1, pp.12 - 29

Received: 05 Jul 2016
Accepted: 07 Dec 2016
Published online: 24 Sep 2017 *

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