Signaling in financial markets A study on Indian futures market

Abstract

There are several types of markets across the world. Starting from the pure competition to the oligopoly market type, each has its own importance. This study attempts to understand the functional relationship between trading value and trading price of Nifty Futures. It also tries to understand the cause and effect of this functional relationship in demand side, supply side and equilibrium situations. Further, the study evaluated the signaling effect of efficient pricing system and efficient order entry system. This study used the high frequency limit order data for S and P CNX Nifty Index futures contract from December 02, 2002 to November 30, 2004, which is provided by National Stock Exchange of India Limited. In the first phase Box-Cox transformation model is used. In the second and third phases of estimation the GARCH (1, 1) framework model with two stage modeling procedure is used. The efficient pricing system and efficient order entry system have signaling effect. The proposed theoretical model uses these signals and is perhaps appropriate to maximize the returns. The estimated elasticity of demand is greater than one for the period of study. Therefore, the Indian Nifty Futures market appears to be a monopoly type. However, the degree of monopoly is reducing over time. It is expected that, in course of time, the market will become competitive. newline