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Do Individual Index Futures Investors Destabilize the Underlying Spot Market?

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Author Info

  • Martin T. Bohl
  • Christian A. Salm
  • Bernd Wilfling

Abstract

This 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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File URL: http://www1.wiwi.uni-muenster.de/cqe/forschung/publikationen/cqe-working-papers/CQE_WP_6_2009.pdf
File Function: Version of October, 2009
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Bibliographic Info

Paper provided by Center for Quantitative Economics (CQE), University of Muenster in its series CQE Working Papers with number 0609.

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Length: 31 pages
Date of creation: Oct 2009
Date of revision:
Handle: RePEc:cqe:wpaper:0609

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Related research

Keywords: Individual Investors; Uninformed Trading; Stock Index Futures; Emerging Capital Markets; Stock Market Volatility; Markov-Switching-GARCH Model;

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Cited by:
  1. Chyi Lee & Simon Stevenson & Ming-Long Lee, 2014. "Futures Trading, Spot Price Volatility and Market Efficiency: Evidence from European Real Estate Securities Futures," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 299-322, February.

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