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Spot price volatility, information and futures trading: evidence from a thinly traded market

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  • Phil Holmes

Abstract

The impact of futures trading on spot volatility is examined for a thinly traded contract, the FTSE Eurotrack. Futures trading increases the rate at which information is impounded into prices and reduces persistence. These benefits cease after the suspension of trading. The results suggest that even in a thinly traded market the existence of futures has a beneficial impact on price discovery in the underlying spot market. The paper highlights the need to determine not only whether spot price volatility changes after the introduction of futures trading, but also, if it does, why it does, before drawing policy conclusions about the regulation of futures markets. Failure to address the latter issue may lead to inappropriate policy conclusions.

Suggested Citation

  • Phil Holmes, 1996. "Spot price volatility, information and futures trading: evidence from a thinly traded market," Applied Economics Letters, Taylor & Francis Journals, vol. 3(1), pages 63-66.
    • Handle: RePEc:taf:apeclt:v:3:y:1996:i:1:p:63-66
    DOI: 10.1080/758525520
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    References listed on IDEAS

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    1. Franklin R. Edwards, 1988. "Futures trading and cash market volatility: Stock index and interest rate futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 8(4), pages 421-439, August.
    2. Harris, Lawrence, 1989. " S&P 500 Cash Stock Price Volatilities," Journal of Finance, American Finance Association, vol. 44(5), pages 1155-1175, December.
    3. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78, World Scientific Publishing Co. Pte. Ltd..
    4. 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.
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    Cited by:

    1. Hyun-Jung Ryoo & Graham Smith, 2004. "The impact of stock index futures on the Korean stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 14(4), pages 243-251.
    2. Mustafa Okur & Emrah Cevik, 2013. "Testing Intraday Volatility Spillovers in Turkish Capital Markets: Evidence from Ise," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 26(3), pages 99-116, January.
    3. Wurm, Laura, 2021. "Strangling speculation: The effect of the 1903 Viennese futures trading ban," QUCEH Working Paper Series 21-09, Queen's University Belfast, Queen's University Centre for Economic History.
    4. Chien-Cheng Wang & Yung-Shi Liau & Jack J.W. Yang, 2009. "Information Spillovers In The Spot And Etf Indices In Taiwan," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 3(1), pages 117-131.

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