Impact of derivatives trading on spot market volatility: an empirical study

Abstract

This paper investigates the impact of introduction of derivative instruments and leverage and asymmetric effect on spot market volatility (Nifty) in India during the period October 1995 to December 2006 by using GARCH, EGARCH, TARCH and component ARCH model. The results suggest towards a decline in spot market volatility and market efficiency improved after introduction of index futures, stock futures, stock options and index options on the spot market due to increase impact of recent news. This study also finds evidence of leverage and asymmetric effect on spot market where the conditional variance is an asymmetric function of past innovation, rising proportionately more during market declines. It is also observed that the asymmetric GARCH models provide better fit than the symmetric GARCH model. Thus to predict stock market volatility, one should use the asymmetric model which can capture the so-called leverage effect observed in our study.

The Impact of Futures Trading Over Spot Market Intraday Volatility: Evidence From an Emerging Market, Borsa Istanbul

“…Moreover the estimated coefficient (dummy variable) are negative for three futures periods and significant implying that the introduction of stock index futures induced a decrease in volatility in the associated spot market. These results are consistent with some of the previous studies in literature (Pradhan 2008, Tripathy et al 2009, Srinivasan and Bhat 2008, Drimbetas et al 2007, Antoniou, Holmes and Priestly 1998.…”

“…The analysis reveals most of the selected commercial banking stocks reveal an introduction of futures markets declined the volatility of stock market. Pradhan (2008) and Tripathy et al (2009) investigated the impact of futures trading on daily spot market volatility in India. The empirical findings of the three studies are similar.…”

The Impact of Index Future Introduction on Spot Market Returns and Trading Volume: Evidence from Ho Chi Minh Stock Exchange

“…However, findings from these studies have not been consistent in the literature. Some studies claim that the introduction of futures trading reduce the volatility of spot markets (McKenzie, Brailsford, & Faff, 2001;Bologna & Cavallo, 2002;Pilar & Rafael, 2002;Tripathy, Ramana Rao, & Kanagaraj, 2009;Hou & Li, 2014;Yilgor & Mebounou, 2016). The stabilization impact of futures trading can be explained by two main reasons:…”

Derivativos sobre commodities influenciam a volatilidade dos preços à vista? Uma análise nos mercados de boi gordo e café arábica no Brasil

“…Observam-se quatro técnicas distintas: i) cômputo da volatilidade dos preços à vista do ativo antes e depois da criação do derivativo (com o uso de modelos da família ARCH/GARCH 7 ); ii) análise da volatilidade de ações inclusas e não inclusas em índice que passou a ter futuros em negociação; iii) avaliação da causalidade entre volume de contratos negociados e a volatilidade dos preços spot (MAYHEW, 2000;ILLUECA e LAFUENTE, 2003; iv) observação de causalidade entre as volatilidades dos preços futuros e 7. Proposto por Bollerslev (1986) Tripathy et al (2009), Srinivasan e Bhat (2008), Kasman e Kasman (2008), Alexakis (2007), Drimbetas et al (2007), Spyrou (2005), Bandivadekar e Ghosh (2003), Illueca e Lafuente (2003), Pilar e Rafael (2002), Bologna e Cavallo (2002) e Board et al (2001). Por outro lado, Bae et al (2009), Rao (2007), Zhong et al (2004), Pok e Poshakwale (2004), Ryoo e Smith (2004) e Ahmad, Shah e Shah (2010) encontraram evidências de aumento na volatilidade das ações ou índices após a introdução dos contratos futuros 8 .…”