Informational Efficiency and Unbiasedness of Stock Futures in India—An Empirical Analysis

Abstract

The present article examines the informational efficiency and unbiasedness of stock futures in India. The study analyses the daily spot and futures data of 20 companies listed on the National Stock Exchange (NSE) from 9 November 2001 to 30 July 2021. The study employs econometric tools like Johansen’s cointegration test, likelihood ratio test, vector error correction model and Chow breakpoint test. The results show that the futures prices of most companies are unbiased and efficient in the long run, as the null hypothesis of unbiasedness is not rejected. The error correction term is higher for the equity market than for the futures market of 13 companies. It indicates that when the futures prices and the underlying spot prices move apart from equilibrium in the short term, the spot market makes more adjustments to restore equilibrium. The structural breaks identified by the Chow breakpoint test did not affect the error correction process, as they were insignificant for most companies. The findings demonstrate that futures markets act as a central point for the dissemination of information to numerous buyers and sellers. Thus, market participants can rely on futures markets’ price movements for suitable trading strategies.