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This article first examines the existence of a change in the structure of conditional volatility of stock returns around the time when trading in individual stock derivatives is introduced. Thereafter, it analyses the extent of the structural change between the pre- and post-derivatives regimes, after allowing for asymmetric response to 'good' and 'bad' news, following the Generalized Autoregressive Conditional Heteroscedastic (GARCH) family of models. Since the exact point of regime change is known for each stock analysed, the article specifies alternative switching asymmetric GARCH (Exponential GARCH (EGARCH), Periodic GARCH (PGARCH) and Glosten-Jagannathan-Runkle GARCH (GJR GARCH)) models for each stock. The final choice of model is made on the basis of the news impact curve. The main finding of this study is that although derivatives seem to enhance the quantity of information transmitted to the spot market, the quality of such information is doubtful, resulting in delayed incorporation of such information into price. This, the article argues, may be because trading volumes in the Indian derivatives market are dominated by retail investors who lack access to information relevant for trading in the short run. The article then builds a case for introducing longer term derivative instruments for more meaningful retail participation.
