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Index Futures Trading and Stock Return Volatility: Evidence from the Introduction of MidCap 400 Index Futures

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  • Galloway, Tina M
  • Miller, James M

Abstract

The MidCap 400 stock index is used to provide new evidence on the relation between stock index futures trading and stock return volatility. The study documents a significant decrease in return volatility and systematic risk, and a significant increase in trading volume for the MidCap index. A control sample of medium-capitalization stocks, however, exhibits similar contemporaneous changes in these measures. The MidCap stocks and the control stocks also experience a significant decrease in volatility and an increase in volume after the introduction of MidCap 400 index futures. Thus, the study finds no difference in the behavior of the MidCap 400 stocks and the control stocks and no evidence of a relation between index futures trading and volatility in the stock market. Copyright 1997 by MIT Press.

Suggested Citation

  • Galloway, Tina M & Miller, James M, 1997. "Index Futures Trading and Stock Return Volatility: Evidence from the Introduction of MidCap 400 Index Futures," The Financial Review, Eastern Finance Association, vol. 32(4), pages 845-865, November.
    • Handle: RePEc:bla:finrev:v:32:y:1997:i:4:p:845-65
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    Cited by:

    1. Bohl, Martin T. & Diesteldorf, Jeanne & Siklos, Pierre L., 2015. "The effect of index futures trading on volatility: Three markets for Chinese stocks," China Economic Review, Elsevier, vol. 34(C), pages 207-224.
    2. Suparna Nandy (Pal) & Arup Kr. Chattopadhyay, 2014. "Impact of Introducing Different Financial Derivative Instruments in India on Its Stock Market Volatility," Paradigm, , vol. 18(2), pages 135-153, December.
    3. Wee Ching Pok & Sunil Poshakwale, 2004. "The impact of the introduction of futures contracts on the spot market volatility: the case of Kuala Lumpur Stock Exchange," Applied Financial Economics, Taylor & Francis Journals, vol. 14(2), pages 143-154.
    4. Benilde Maria do Nascimento Oliveira & Manuel Jose da Rocha Armada, 2005. "Structural Changes of the Conditional Volatility of the Portuguese Stock Market," Multinational Finance Journal, Multinational Finance Journal, vol. 9(3-4), pages 189-214, September.
    5. Greppmair, Stefan & Theissen, Erik, 2019. "Small is beautiful? How the introduction of mini futures contracts affects the regular contract," CFR Working Papers 19-06, University of Cologne, Centre for Financial Research (CFR).
    6. Md. Mohibul Islam & Anisul M. Islam, 2017. "Impact of Index Options on Emerging Market Volatility: The Case of the Malaysian Equity Market," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(9), pages 157-15-172, 09-2017.
    7. Ashish Kumar, 2015. "Impact of Currency Futures on Volatility in Exchange Rate," Paradigm, , vol. 19(1), pages 95-108, June.
    8. Greppmair, Stefan & Theissen, Erik, 2022. "Small is beautiful? How the introduction of mini futures contracts affects the regular contracts," Journal of Empirical Finance, Elsevier, vol. 67(C), pages 19-38.
    9. Ismail bin Ahmad & Fahmi bin Abdul Rahim, 2009. "International price relationship and volatility transmission between stock index and stock index futures," Economic Journal of Emerging Markets, Universitas Islam Indonesia, vol. 1(1), pages 61-75, April.

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