Abstract

In the light of ongoing economic and financial sector reform initiated by the Indian government since 1991, India's capital market has undergone liberalisation for more than two decades. The increased free flow of capital in and on markets that fostered integration is driven by the emergence of information technology, considerable deregulation and harmonization. Market integration results in volatility being transmitted between different markets and within the market as a whole. Increased volatility in equity returns is a common concern that has arisen with these developments. The level of uncertainty or risk related to the size of a security price change is measured as volatility. Volatility is a measure of variability in dispersion with respect to the central tendency. When volatility is high, it means that the security's value can be shared between many values. That is to say, prices of securities could change dramatically in both directions within the short term. The present paper examines the impact of derivatives trading on the stock market volatility. In case of rapid growth or sharp drop in stock markets over a short time period, the market is deemed to be 'volatile.' The volatility in stock markets worldwide has been a concern not only for India's policymakers, but also to investors around the world. Investors are interested in knowing how much volatility or risk they're exposed to, as stocks that are more volatile tend to be riskier. Derivatives are amongst the most preferred tools available for market participants to manage their risks in today's securities trading.

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