Essays on Indian Futures Markets

Exchange derivatives trading for national level commodity futures and equity index futures in India started in 2003 and 2001 respectively. Despite of the institutional ecosystem being put in place for nearly two decades, the participation of farmers and Farmer Producer Organizations' (FPOs) in agricultural futures trade is extremely low in India; and unlike most global Exchanges, the decision for contract sizes, margins and open position limits on the equity or equity index derivatives still remains a part of the regulator's mandate. This doctoral thesis by identifying two regulatory reforms from the Indian market concerning outright suspension of wheat futures contracts and increase in the market lot size of the index futures contracts, focuses on three essays relating to relative market efficiency, price discovery performance and market quality measures. The first essay examines the impact of wheat trading suspension on the degree of market efficiency in the pre-ban and post-ban phases. The second essay using data from the analogous wheat contract analyses if the trading ban have consequences on the market leadership and information flow between the spot and futures prices, under different trading periods. Lastly, the third essay examines whether the increase in the minimum lot sizes of index futures contracts can affect the trading activity variables, market liquidity and price volatility. Analysis from the first essay show that interventions like abrupt trading bans had negative effects on both the long-run market efficiency and short-run efficiency measure. Further results from the second essay reveal that trading suspensions have negative consequences on the short-run price discovery dynamics. Therefore from a viewpoint of attracting more hedgers (farmers' or FPOs) into the market for increasing liquidity and depth, regulators must provide stable policy environment for future trade to flourish. Finally, findings from the third essay suggest that increase in the contract size had positive impact only for the open interest, but the trading volume and liquidity variables were negatively affected. Therefore, the Securities market regulator's interventions in the Exchange's commercial decisions may discourage interest in the equity futures products at large in the long-term.