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Volatility Impact of Stock Index Futures Trading - A Revised Analysis

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  • Wagner, Helmut
  • Matanovic, Eva
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    Abstract

    The recent financial crisis renewed concerns about a possible destabilizing impact of derivatives trading. Despite a very active research, the question whether or not derivatives tend to destabilize financial markets has not yet been answered to satisfaction. This contribution aims to revise the robustness of recent empirical findings and to remedy some methodological shortcomings of earlier studies. Acknowledging their practical relevance, we focus on futures and examine the volatility impact of DAX futures trading. Our results confirm a volatility-reducing impact of DAX futures trading, whereas the observed deterioration of the fundamental price building process proved to be statistically insignificant.

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    File URL: http://mpra.ub.uni-muenchen.de/51204/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 51204.

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    Date of creation: 2012
    Date of revision:
    Publication status: Published in Journal of Applied Finance & Banking 5.2(2012): pp. 113-126
    Handle: RePEc:pra:mprapa:51204

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    Keywords: Financial market stability; financial market volatility; GARCH; stock index futures; derivatives;

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    1. Hart, Oliver D. & Kreps, David M., 1986. "Price Destabilizing Speculation," Scholarly Articles 3448679, Harvard University Department of Economics.
    2. Stein, Jeremy C., 1987. "Informational Externalities and Welfare-Reducing Speculation," Scholarly Articles 3660740, Harvard University Department of Economics.
    3. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    4. Nelson, Daniel B & Cao, Charles Q, 1992. "Inequality Constraints in the Univariate GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(2), pages 229-35, April.
    5. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    6. Antoniou, Antonios & Koutmos, Gregory & Pericli, Andreas, 2005. "Index futures and positive feedback trading: evidence from major stock exchanges," Journal of Empirical Finance, Elsevier, vol. 12(2), pages 219-238, March.
    7. Chin Alycia & Warusawitharana Missaka, 2010. "Financial Market Shocks during the Great Depression," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-27, September.
    8. Garry J. Schinasi, 2006. "Preserving Financial Stability," IMF Economic Issues 36, International Monetary Fund.
    9. Ross, Stephen A, 1989. " Information and Volatility: The No-Arbitrage Martingale Approach to Timing and Resolution Irrelevancy," Journal of Finance, American Finance Association, vol. 44(1), pages 1-17, March.
    10. Turnovsky, Stephen J & Campbell, Robert B, 1985. "The Stabilizing and Welfare Properties of Futures Markets: A Simulation Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 277-303, June.
    11. Lee, Sang-Won & Hansen, Bruce E., 1994. "Asymptotic Theory for the Garch(1,1) Quasi-Maximum Likelihood Estimator," Econometric Theory, Cambridge University Press, vol. 10(01), pages 29-52, March.
    12. Pierluigi Bologna & Laura Cavallo, 2002. "Does the introduction of stock index futures effectively reduce stock market volatility? Is the 'futures effect' immediate? Evidence from the Italian stock exchange using GARCH," Applied Financial Economics, Taylor & Francis Journals, vol. 12(3), pages 183-192.
    13. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
    14. Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
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