Understanding Bank Futures Trading in Financial Crisis

Financial crisis teaches a lot. It gives real time experience to the traders about dealing derivatives in times of volatility. Derivatives was introduced to replicate growth levers of developed stock market and major global economies to boost growth of Indian stock market. Observing volatile periods and historical data give insightful information about stock trading. Due to corona, there is sharp decline in least expected stocks. Indian traders in pandemic can learn from the historical data of financial crisis that occurred in 2008 to 2009.

The historical data with simple analysis of the futures data help traders in overcoming most common question of how to start share trading in Banks Nifty market.

(a) Historical Data in Bank Futures

Since formation, NSE established itself as the leading market in this segment in India and during 2008-09 financial crisis, it accounted for 99 % of the market share (NSE, 2009). The total turnover on the F&O Segment was ₹ 11,010,482 crore (US ₹ 2,161,037 million) during 2008- 09. The average daily turnover during 2008-09 was ₹ 45, 311 crore (US ₹ 8,893 million).

Most of the traders closely observe trends of S&P CNX Nifty. Only expert traders watch sector based indices as SEBI is regularly introducing more future and option contracts on these indices. The impact of future trading on Bank Nifty is therefore observed in times of financial crisis. Bank Nifty Index is an index comprised of the large capitalized Indian Banking stocks. It provides the platform to investors, traders, stock brokers and intermediaries with a benchmark that captures the capital market performance of Indian Banks. The index has 12 major banks from the banking sector which trade on the National Stock Exchange.

Taking 2008-2009 volatile period into account, for the last six months of Bank Nifty Index stocks, the total traded value was approximately 96% of the traded value of the banking sector. Bank Nifty Index stocks represent about 87% of the total market capitalization of the banking sector (March 31, 2009). The proportion stayed almost same as of December 2020, 87% of the traded value of the stocks were from Banking sector. The Banks contribution determines its significance in understanding trends.

The total traded value for the last six months of all the Bank Nifty Index constituents was approximately 15.26% of the traded value of all stocks on the NSE. Bank Nifty Index constituents represented about 7.74% of the total market capitalization (March 31, 2009). This became 14.84% of the traded value as of December 2020.

(b) Understanding Futures Trading Data (Analysis)

You can use share market app to understand the impact of future trading on volatility of stock prices of banking sector is important. To learn, you can develop a data range consisting of closing values of Bank Nifty as well as closing values of individual banks from April 1, 2003 to March 31, 2008 and compare it with next 5 years cycle leading up to March 31, 2020. You use least square method and EGARCH model to capture the leverage effect and volatility clustering phenomenon of data. The analysis will help you in obtaining evidences of future volatility in Bank Nifty stocks especially major players like HDFC, Axis and ICICI banks. The result of such analysis will also show the presence of leverage effect (emerging from good or bad news) doesn’t have equal effect on volatility and its co-relation with global crisis. Without putting time in analysis, you cannot become expert trader in stock market.

Evaluate the impact of future trading on stock market volatility of banking sector with stock market courses.