Price movements in futures and spot markets: Evidence from the S&P CNX Nifty Index

Abstract

This paper is examined the price discovery and causality between spot and futures markets. Then, it forecasts spot prices using in NIFTY futures markets. Vector Error Correction Model (VECM), Impulse Response Function analysis and Variance Decomposition analysis are used to examine the price discovery process between spot and futures prices. This paper compares the forecast ability of futures prices on spot prices using Auto Regressive Integrated Moving Average (ARIMA) and VEC model. The results find that there exists a bi-directional causality between Nifty spot and futures markets and the spot markets disseminate new information stronger than futures prices. The forecast performance of VEC model is better than ARIMA model on post-sample periods. Because, VEC model incorporates the importance of taking into account the long-run relationship between the futures and the spot prices in forecasting future spot prices.