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Derivatives and asset price volatility: a test using variance ratios

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Author Info
Benjamin H. Cohen (International Monetary Fund (IMF))
Abstract

The implications of the presence of derivative instruments for price movements in underlying financial markets are tested by comparing the variances of price changes over different time horizons before and after the start of organised derivatives trading. It is found that ratios of the variances of multi-day and daily price movements decline for bond prices and stock indices in the United States and Germany, though no such effect is found for Japanese bonds. For the stock indices, the post-derivatives variance ratios are statistically indistinguishable from those that would be characteristic of a random walk, though this is not found to be the case for the bonds. This is interpreted to mean that derivatives accelerate the incorporation of new information into asset prices.

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Paper provided by Bank for International Settlements in its series BIS Working Papers with number 33.

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Length: 28 pages
Date of creation: Jan 1996
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Handle: RePEc:bis:biswps:33

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Campbell, John Y & Mankiw, N Gregory, 1987. "Are Output Fluctuations Transitory?," The Quarterly Journal of Economics, MIT Press, vol. 102(4), pages 857-80, November. [Downloadable!] (restricted)
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  2. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 893-920, October. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  4. Brorsen, W., 1989. "Futures Trading, Transaction Costs, And Stock Market Volatility," Papers 188, Columbia - Center for Futures Markets.
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  1. Jürgen Von Hagen & Ingo Fender, 1998. "Central Bank Policy in a More Perfect Financial System," Open Economies Review, Springer, vol. 9(1), pages 493-532, January. [Downloadable!] (restricted)
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