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KIRAN KUMAR K V, Faculty – Finance, ISME
SREENIVASA K M, BM, Kotak Mahindra Bank
Financial Derivatives are contractual hedges designed to support the risk managing process of portfolio managers and other asset holders. As investment product financial derivatives has always been taken with a pinch of salt by the global market participants. One of the prime reasons for derivatives being welcomed with skepticism in the initial days has been the settlement issues. It was the subsequent realization by the largely non-participative hedging community; about the various hedging strategies that could be used to minimize and at times mitigate the risk of holding the assets that opened the doors for derivatives as a significant product for consideration. As the financial world started becoming volatile, complex uncertain and ambiguous (aka VUCA), the impetus for derivative product and the frequency and magnum of usage increased. As on today, derivatives is a product used on par with any other fixed income and equity security, in advanced as well as developing economies across, capital, commodity and forex markets.Financial market regulators all over the world are worried constantly with regards to the increasing participation of individual and retail segment of investors in the financial derivative products. While it is an always welcome trend to have large number of retail investors participating in financial markets, the cause of concern is the growing interest of individual investors towards derivative market as motivated by their speculative mind set. However, there is no publicly available data which confirms the speculative moods of retail inventors. Yet, the same cannot be ignored as the increasing turnover in the market advocate the fact that retail investors are more speculative intensive, Despite being the investment strategies and settlement payoff of the derivative exchanges is complex and at times may not be easily comprehended by the small or retail investors. 

This article is an attempt towards studying the impact on such events on individual investor’s volume. We have conducted an Event study on Nifty prices from 2015 to 2018. The broad objective of the study is to analyze the impact of various regulatory steps taken by SEBI in order to curb the individual investors’ speculative exposure in derivative segment.

An Event Study has been conducted to achieve the above objectives. An event study helps in finding out whether these information reflect the assets price or share price during day of event. An event in this study is defined as the date of a policy change announced by SEBI. After the event will be taken to study the abnormal return on the asset price. After computation of abnormal return a T-Test will be computed to verify the statistical significance of the abnormal return.  If T-test result satisfies the 95% significant level then event can be concluded that there a significant impact of event occurrence. Present study historical data pertain to total volume of equity derivative segment from, period from May 2015 to June 2018. Total equity derivative trading volume on daily and participant basis has been considered.

To conduct event study following equation has been use.

1) Abnormal return: Abnormal return computed based on below equation. Time series data for equity derivative total volume taken participant wise. 30 days prior to the event and 30 days after the event window has been taken.
ARit = Rit – ERit
AR= abnormal return of security I in during period T
Rit = Return of security I in during period T
ERit = Expected Return of I security on period T
      2) Rate of Return on security is calculated based on below equation:
Rit = (Pit – Pit-1)/Pit – 1
Rit = return of security I during period T
< span lang="EN-US">Pit = price of security I during period T
Pit-1 = Price of security I during the period T-1

     3) Expected rate of return is calculated based on below equation
ERit = ai + Bi Rmt + eit
ERit = Expected rate of return of security I in period T
Ai = average rate of return of security I in period zero market return
Bi = Beta coefficient of security (Ramachandran, 2013)

Entire set of data has been analyzed using Microsoft excel. The event dates of SEBI are given below. Data for this period collected from Data includes total volume equity derivative segment which is classified among market participants like individual, Domestic Institutional Investor (DII) Foreign Institutional Investors (FII) and Proprietary Trading (Pro).

Below hypotheses are tested for

     a) There is no significant impact on total volume of individual traders in equity derivative segment on event day.
     b) There is no significant abnormal return on individual trade volumes on event day


Since 2015 to 2018 SEBI has made 8 major announcements with reference to equity derivative trading and settlement.  Each of the event date wise given below to find out the significant impact on the volume of retail or individual participant in equity derivative market. SEBI has made these changes in equity derivative market to control the surge in speculative trades of individual investors. However this study provides evidence whether these changes has brought changes in trading volume of individual investors or not. 
During these event day if volume of retail investor has gone down then, we can say there is an impact if there is increase or no  change in volume we can say no impact from these policy changes. Further these changed volume has tested to know the statistical significance. It these impact full fill the T-Test then we can conclude SEBI objective of implementing some of the policy change impacted on reducing the volume of retail investors.

Table given below shows data analysis which gives the computed T-value and table value at 95% significant level.

Except SEBI event dated 29.10.2015 which is statically significant at 95% significant level, rest all the event are not created significant impact on the retail volume. SEBI need to think on reasons behind speculative mind sets of individual investors. Further research need to be conducted on behavior factors of retails investors to research various behavioral factors which influencing individual investors. This will help in further strengthening the investor education and other required structural changes in equity derivative market.
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