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The Effect Of Futures Trading Activity On The Distribution Of Spot Market Returns


  • Juan A. Lafuente

    () (Universitat Jaume I)

  • Manuel Illueca Muñoz

    (Universitat Jaume I)


There is extensive empirical research on the potential destabilizing effects of futures trading activity on spot market volatility. Rather than just focussing on spot volatility, this paper deals with the contemporaneous relationship between futures trading volume and the overall probability distribution of spot market returns. To disentangle the potential destabilizing effect of futures trading activity from cross-interactions due to price discovery process, futures volume is broken down into two drivers: expected and unexpected trading activity. Then, a non-parametric approach is used to estimate the density function of spot return conditional to both spot and futures trading volume. Empirical evidence using intraday data from the Spanish stock index futures market over the period 2000-2002 is provided. Our empirical findings can be summarized as follows: i) spot market volatility is positively related to spot trading volume, ii) for any given spot trading volume, a significant and positive relationship between unexpected futures trading activity and spot volatility is detected; however no significant relationship arises when expected futures trading volume is considered. These findings are consistent with theoretical models predicting that futures trading activity is not a force behind irrational spot price fluctuations. Existe abundante evidencia empírica en la literatura acerca de la potencial transmisión de volatilidad desde los mercados de futuros hacia el correspondiente mercado subyacente. Para contrastar la existencia de una potencial desestabilización desde el mercado de derivados, en este trabajo se propone un enfoque más general apartir del análisis de la relación entre el volumen negociado en el mercado de futuros y la toda la distribución de probabilidad de la rentabilidad del subyacente. Para diferenciar la potencial desestabilización de las interacciones derivadas del procesode formación de precios, se descompone el volumen negociado en sus componentes esperada y no esperada. A partir de esta descomposición, se lleva a cabo una estimación no paramétrica de la función de densidad de la rentabilidad del subyacente condicional al volumen negociado, tanto en el mercado de contado comoen el mercado de futuros. Sobre la base del nuevo enfoque propuesto, se proporciona evidencia empírica para el mercado español de futuros sobre el Ibex 35 a lo largo del periodo 2000-2002. La evidencia empírica detectada pone de manifiesto dos aspectos relevantes: a) la volatilidad del mercado de contado está positivamente correlacionada con el volumen de negociación en dicho mercado y b) dado un nivel de negociación en el mercado de contado, se observa una relación positiva entre la negociación inesperada en el mercado de derivados y la volatilidad del mercado de contado. Estos dos aspectos no son coherentes con la idea de que el mercado de futuros es una fuente de desestabilización para el mercado de contado.

Suggested Citation

  • Juan A. Lafuente & Manuel Illueca Muñoz, 2003. "The Effect Of Futures Trading Activity On The Distribution Of Spot Market Returns," Working Papers. Serie EC 2003-23, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  • Handle: RePEc:ivi:wpasec:2003-23

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    References listed on IDEAS

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    11. Tse, Yiuman, 2001. "Index arbitrage with heterogeneous investors: A smooth transition error correction analysis," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1829-1855, October.
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    Cited by:

    1. M. Illueca & J. Lafuente, 2008. "Introducing the mini-futures contract on Ibex 35: implications for price discovery and volatility transmission," Spanish Economic Review, Springer;Spanish Economic Association, vol. 10(3), pages 197-219, September.
    2. Abdul Hakim & Michael McAleer, 2009. "VaR Forecasts and Dynamic Conditional Correlations for Spot and Futures Returns on Stocks and Bonds," CIRJE F-Series CIRJE-F-676, CIRJE, Faculty of Economics, University of Tokyo.


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