Do Individual Index Futures Investors Destabilize the Underlying Spot Market?
AbstractThis paper investigates the impact of introducing index futures trading on the volatility of the underlying stock market. We exploit a unique institutional setting in which presumably uninformed individuals are the dominant trader type in the futures markets. This enables us to investigate the destabilization hypothesis more accurately than previous studies do and to provide evidence for or against the in uence of individuals trading in index futures on spot market volatility. To overcome econometric shortcomings of the existing literature we employ a Markov-switching-GARCH approach to endogenously identify distinct volatility regimes. Our empirical evidence for Poland surprisingly suggests that the introduction of index futures trading does not destabilize the spot market. This nding is robust across 3 stock market indices and is corroborated by further analysis of a control group.
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Bibliographic InfoPaper provided by Center for Quantitative Economics (CQE), University of Muenster in its series CQE Working Papers with number 0609.
Length: 31 pages
Date of creation: Oct 2009
Date of revision:
Contact details of provider:
Postal: Am Stadtgraben 9, 48143 Münster, Germany
Web page: http://www1.wiwi.uni-muenster.de/cqe/
More information through EDIRC
Individual Investors; Uninformed Trading; Stock Index Futures; Emerging Capital Markets; Stock Market Volatility; Markov-Switching-GARCH Model;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G20 - Financial Economics - - Financial Institutions and Services - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-11 (All new papers)
- NEP-FMK-2009-12-11 (Financial Markets)
- NEP-MST-2009-12-11 (Market Microstructure)
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