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The impact of the introduction of futures contracts on the spot market volatility: the case of Kuala Lumpur Stock Exchange

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  • Wee Ching Pok
  • Sunil Poshakwale

Abstract

In investigating the impact of futures trading on spot market volatility, it is not obvious to what extent the results obtained using data from well developed and highly liquid markets are applicable to emerging markets. This paper provides evidence on the impact of the introduction of futures trading on spot market volatility using data from both the underlying and non-underlying stocks in the emerging Malaysian stock market. Results show that the onset of futures trading increases spot market volatility and the flow of information to the spot market. It is found that the underlying stocks respond more to recent news, while the non-underlying stocks respond more to old news. The lead-lag and causal relationship between futures trading activity and spot market volatility is also examined. VAR results show that the impact of the previous day's futures trading activity on volatility is positive but short (only a day). This is further confirmed by Granger's causality test.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/0960310042000176416
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 14 (2004)
Issue (Month): 2 ()
Pages: 143-154

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Handle: RePEc:taf:apfiec:v:14:y:2004:i:2:p:143-154

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References

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  1. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  2. Lee, Chun I. & Tong, Hung Cheong, 1998. "Stock futures: the effects of their trading on the underlying stocks in Australia," Journal of Multinational Financial Management, Elsevier, vol. 8(2-3), pages 285-301, September.
  3. Cox, Charles C, 1976. "Futures Trading and Market Information," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1215-37, December.
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Cited by:
  1. Nikolaos Sariannidis & Evangelos Drimbetas, 2008. "Impact of international volatility and the introduction of Individual Stock Futures on the volatility of a small market," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 119-.
  2. Pok, Wee Ching & Poshakwale, Sunil S. & Ford, J.L., 2009. "Stock index futures hedging in the emerging Malaysian market," Global Finance Journal, Elsevier, vol. 20(3), pages 273-288.
  3. Kasman, Adnan & Kasman, Saadet, 2008. "The impact of futures trading on volatility of the underlying asset in the Turkish stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(12), pages 2837-2845.
  4. Evangelos Drimbetas & Nikolaos Sariannidis & Nicos Porfiris, 2007. "The effect of derivatives trading on volatility of the underlying asset: evidence from the Greek stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 17(2), pages 139-148.

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