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Impact of Index Options on Emerging Market Volatility: The Case of the Malaysian Equity Market

Author

Listed:
  • Md. Mohibul Islam

    (University of Liberal Arts Bangladesh)

  • Anisul M. Islam

    (Ph.D. University of Houston-Downtown, Texas, USA)

Abstract

This study investigates the impact of the introduction of index options on emerging market volatility in the context of Malaysia. Company specific daily closing prices for 29 listed companies were examined to determine the conditional volatility shifts before and after the introduction of index options. Multiple window periods are examined to avoid year-end effects.The exponential generalized autoregressive conditional heteroskedasticity (EGARCH) (1.1) model is used to determine the conditional volatility shift before and after the introduction of index options in Malaysia. The findings of this study suggest that the introduction of index options reduced market volatility in the Malaysia equity market at the 0.01 level of statistical significance. Further, this study contributed to extant literature because it uses company-specific daily equity price data and no such previous study exists on the impact of index options for this important emerging market. The study will be useful for academics, researchers, domestic and foreign investors and policy-makers, among others.

Suggested Citation

  • Md. Mohibul Islam & Anisul M. Islam, 2017. "Impact of Index Options on Emerging Market Volatility: The Case of the Malaysian Equity Market," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(9), pages 157-15-172, 09-2017.
    • Handle: RePEc:arp:ijefrr:2017:p:157--172
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    More about this item

    Keywords

    Emerging market; Index options; Conditional volatility; EGARCH model;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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