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Index Futures Trading and Spot Price Volatility

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  • Spyros I. Spyrou

Abstract

This article contributes to the debate whether the introduction of derivative instruments stabilises or destabilises markets for underlying assets. It has often been argued that due to the higher degree of leverage, futures markets tend to attract uninformed speculative investors and thus destabilise cash markets by increasing volatility. On the other hand, it has been pointed out that futures markets increase the overall market depth and informativeness, are important for price discovery, allow the transfer of risk, and may actually reduce spot volatility. The empirical evidence is controversial and has been concentrated on large capitalisation markets. This paper investigates the issue for a dynamic emerging market, the Athens Stock Exchange, employing a methodology that allows the examination of changes in the nature of volatility rather than changes in volatility per se, and allowing for asymmetric responses to news. To anticipate the results, spot volatility appears unaffected with some evidence to suggest that uncertainty is actually reduced following the introduction of futures trading.

Suggested Citation

  • Spyros I. Spyrou, 2005. "Index Futures Trading and Spot Price Volatility," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 4(2), pages 151-167, August.
    • Handle: RePEc:sae:emffin:v:4:y:2005:i:2:p:151-167
    DOI: 10.1177/097265270500400203
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Shamila Jayasuriya & William Shambora & Rosemary Rossiter, 2009. "Asymmetric Volatility in Emerging and Mature Markets," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 8(1), pages 25-43, April.
    2. Karathanassis, George & Sogiakas, Vasilios, 2007. "Spill Over Effects of Futures Contracts Initiation on the Cash Market: A Comparative Analysis," MPRA Paper 5958, University Library of Munich, Germany.
    3. Loc Dong Truong & Anh Thi Kim Nguyen & Dut Van Vo, 2021. "Index Future Trading and Spot Market Volatility in Frontier Markets: Evidence from Ho Chi Minh Stock Exchange," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 28(3), pages 353-366, September.
    4. Ashish Kumar, 2015. "Impact of Currency Futures on Volatility in Exchange Rate," Paradigm, , vol. 19(1), pages 95-108, June.
    5. George Karathanassis & Vasilios Sogiakas, 2010. "Spill over effects of futures contracts initiation on the cash market: a regime shift approach," Review of Quantitative Finance and Accounting, Springer, vol. 34(1), pages 95-143, January.
    6. Kutan, Ali M. & Shi, Yukun & Wei, Mingzhe & Zhao, Yang, 2018. "Does the introduction of index futures stabilize stock markets? Further evidence from emerging markets," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 183-197.
    7. Hung, Mao-Wei & So, Leh-Chyan, 2009. "New insights into India’s single stock futures markets," MPRA Paper 52491, University Library of Munich, Germany.
    8. Manolis G. Kavussanos & Ilias D. Visvikis & Panayotis D. Alexakis, 2008. "The Lead‐Lag Relationship Between Cash and Stock Index Futures in a New Market," European Financial Management, European Financial Management Association, vol. 14(5), pages 1007-1025, November.
    9. Imran Riaz Malik & Attaullah Shah, 2016. "Resumption of Single Stock Futures (SSFs) with Stringent Regulations and their Impact on the Risk Characteristics of the Underlying Stocks," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 8(2), pages 1-22, October.

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