A study investigating the role of economic uncertainty and factors affecting futures indices mispricing

ABSTRACT

In this paper, we investigate (a) what are the factors that affect the mispricing in benchmark and sectoral indices;(b) the role of economic policy uncertainty (EPU) on the mispricing in future indices;and (c) is there any relationship between the magnitude of mispricing in future indices and the number of factors affecting it. The study deploys regression analysis on the 6930 observations during the period of 2009-2019 for three major indices i.e., Nifty, Nifty Bank and Nifty IT respectively. The study reports that (a) time to maturity and lag of mispricing affect all three indices positively whereas open interest affects Nifty Bank and Nifty IT negatively and spot volume affects only Nifty IT positively;(b) EPU affects positively to all three indices, reflecting that uncertainty increases the mispricing in the stock market;(c) magnitude of the mispricing is directly related to the number of factors affecting that mispricing. Copyright © 2022 Inderscience Enterprises Ltd.