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Quantifying the Effects of the Inclusion and Segregation of Contracts for Difference in Australian Equity Markets

  • Shaen Corbet

    (DCU Business School (DCUBS), Dublin City University (DCU), Dublin 9, Ireland.)

  • Cian Twomey

    (J.E. Cairnes School of Business and Economics, National University of Ireland, Galway (NUIG), Ireland.)

This study examines the effects that Contracts for Difference (CFDs) have had on the Australian equity market, either as an accelerant for mispricing, or as a source of increased market functionality through the addition of a new tradable product and increased liquidity. The Australian Securities Exchange (ASX) made the decision to segregate CFDs to a separate ring-fenced exchange in November 2007. This study uses EGARCH techniques to test for the effects of CFDs on return volatility at the time of CFD inclusion and segregation in Australian equity markets at the index and equity-specific level. A fully worked explanation and example of a CFD-influenced ‘overhang’ is also provided. The results provide evidence that cannot reject the presence of ‘overhangs’ in Australian equity markets.

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Article provided by Econjournals in its journal International Journal of Economics and Financial Issues.

Volume (Year): 4 (2014)
Issue (Month): 2 ()
Pages: 411-426

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Handle: RePEc:eco:journ1:2014-02-17
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  1. Bessembinder, Hendrik & Seguin, Paul J., 1993. "Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(01), pages 21-39, March.
  2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  3. 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.
  4. Shaen Corbet & Cian Twomey, 2014. "How Have Contracts for Difference Affected Irish Equity Market Volatility?," The Economic and Social Review, Economic and Social Studies, vol. 45(4), pages 559-577.
  5. Baillie, Richard T & Bollerslev, Tim, 1991. "Intra-day and Inter-market Volatility in Foreign Exchange Rates," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 565-85, May.
  6. Robert Bloomfield & Maureen O'Hara & Gideon Saar, 2009. "How Noise Trading Affects Markets: An Experimental Analysis," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2275-2302, June.
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