Abstract

Market-wide position limits (MWPL) and bans on F&O trading in stocks have been enforced in Indian markets since 2004. However, despite the rapid growth in derivative trading volumes in recent years, questions about the optimal position limits and their impact on market quality remain largely underexplored. During the 2019 COVID pandemic, the Securities and Exchange Board of India (SEBI) reduced the MWPL thresholds to 50% of the pre-COVID level to counter systemic risks and extreme market volatility. This regulatory change provides a natural setting to evaluate the impact of changes to MWPL and F&O on market quality in the Indian derivatives market. We find that the changes to MWPL resulted in reduced liquidity and volatility in the spot and futures markets compared to the pre-COVID levels, which declined further during the post-COVID period. However, the volatility in the future markets, particularly the overnight volatility, was greater than the spot market during the ban period. The stocks under repeated bans demonstrated significantly higher overnight volatility in futures, while other volatility measures were higher in the spot market. This analysis offers valuable insights into the evolution of liquidity and volatility in the Indian derivative markets during various pandemic phases.

Keywords: Position Limits, Single Stock Derivatives, Yang-Zang Volatility, RSY Volatility

How to Cite:

Panda, P., Parida, S., Balakrishnan, A. & Chari, L., (2025) “Do Position Limits in Single Stock Derivatives Benefit Equity Markets?”, Australasian Accounting, Business and Finance Journal 19(5), 148–165. doi: https://doi.org/10.14453/aabfj.v19i5.09

Rights:

In Copyright