The Impact of Financial Derivatives on Market Volatility: With Special Reference to The National Stock Exchange Of India

Abstract

This study examines how derivative trading activity on the National Stock Exchange (NSE) of India has influenced underlying market volatility over approximately 13 years, from FY 2012-13 to December 2025. Using a dataset of 3,247 trading days, the research applies four econometric approaches: GARCH(1,1) modelling, Ordinary Least Squares (OLS) regression, Vector Autoregression (VAR), and Granger causality testing. Results indicate that futures and options trading volumes positively and significantly affect conditional market volatility, while foreign institutional investor (FII) inflows and market size exert a stabilising influence. A bidirectional causal relationship between derivative trading and volatility is identified, suggesting a self-reinforcing feedback mechanism. The India VIX reached its highest level of 38.9 during the COVID-19 crisis year and declined to its lowest of 13.4 by December 2025, reflecting post-recovery stability. The findings carry practical relevance for investors, risk managers, and regulatory bodies, particularly the Securities and Exchange Board of India (SEBI).