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Quantifying the Effects of the Inclusion and Segregation of Contracts for Difference in Australian Equity Markets

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Author Info

  • Shaen Corbet

    (DCU Business School (DCUBS), Dublin City University (DCU), Dublin 9, Ireland.)

  • Cian Twomey

    (J.E. Cairnes School of Business and Economics, National University of Ireland, Galway (NUIG), Ireland.)

Abstract

This study examines the effects that Contracts for Difference (CFDs) have had on the Australian equity market, either as an accelerant for mispricing, or as a source of increased market functionality through the addition of a new tradable product and increased liquidity. The Australian Securities Exchange (ASX) made the decision to segregate CFDs to a separate ring-fenced exchange in November 2007. This study uses EGARCH techniques to test for the effects of CFDs on return volatility at the time of CFD inclusion and segregation in Australian equity markets at the index and equity-specific level. A fully worked explanation and example of a CFD-influenced ‘overhang’ is also provided. The results provide evidence that cannot reject the presence of ‘overhangs’ in Australian equity markets. Classification-JEL: G12; G15

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Bibliographic Info

Article provided by Econjournals in its journal International Journal of Economics and Financial Issues.

Volume (Year): 4 (2014)
Issue (Month): 2 ()
Pages: 411-426

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Handle: RePEc:eco:journ1:2014-02-17

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Related research

Keywords: Contracts for Difference; EGARCH; equity markets; volatility.;

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  1. Pierluigi Bologna & Laura Cavallo, 2002. "Does the introduction of stock index futures effectively reduce stock market volatility? Is the 'futures effect' immediate? Evidence from the Italian stock exchange using GARCH," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(3), pages 183-192.
  2. Baillie, R.T. & Bollerslev, T., 1989. "Intra Day And Inter Market Volatility In Foreign Exchange Rates," Papers, Michigan State - Econometrics and Economic Theory 8811, Michigan State - Econometrics and Economic Theory.
  3. Robert Bloomfield & Maureen O'Hara & Gideon Saar, 2009. "How Noise Trading Affects Markets: An Experimental Analysis," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(6), pages 2275-2302, June.
  4. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, Econometric Society, vol. 59(2), pages 347-70, March.
  5. Bessembinder, Hendrik & Seguin, Paul J., 1993. "Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 28(01), pages 21-39, March.
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