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The Effects of Derivatives Trading on Stock Market Volatility and Market Efficiency: Some Evidence from European Markets

In: Asset Pricing, Real Estate and Public Finance over the Crisis

Author

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  • Giovanni Liccardo

Abstract

The impact of derivative trading on the volatility of the underlying assets is an issue that has long interested academics, regulators and investors. In particular, media and policy makers are concerned about how futures and options may affect the underlying spot market. In fact, it is believed that derivatives’ trading attracts speculators who can destabilize spot prices, allowing them to use the leverage and requiring only a margin of the entire position held. It has been demonstrated that most of the speculative activity has shifted from the cash market to the derivatives market that, for the reasons given above, provides more facilities for speculation. These concerns support the idea that greater regulation of the derivatives market is needed. However, first of all it is important to understand if there is a causal link between the introduction of derivative instruments and the volatility of the underlying stock market.

Suggested Citation

  • Giovanni Liccardo, 2013. "The Effects of Derivatives Trading on Stock Market Volatility and Market Efficiency: Some Evidence from European Markets," Palgrave Macmillan Studies in Banking and Financial Institutions, in: Alessandro Carretta & Gianluca Mattarocci (ed.), Asset Pricing, Real Estate and Public Finance over the Crisis, chapter 2, pages 25-37, Palgrave Macmillan.
    • Handle: RePEc:pal:pmschp:978-1-137-29377-0_3
    DOI: 10.1057/9781137293770_3
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