Impact of Single Stock Futures on Feedback Trading, Trading Volume and Volatility: A Modified Approach

Abstract

While an extensive amount of literature exists on the role of futures markets in influencing various dynamics of spot markets, the question whether they stabilize or destabilize the underlying spot market is unresolved. This study addresses this concern and investigates the impact of SSFs (particularly in terms of their destabilizing ability) on the underlying stocks. This study contributes to the literature of financial economics by modifying the famous (Sentana & Wadhwani, 1992) model and adding trading volume as a control variable along with Generalized Error Distribution (GED) to capture leptokurtic nature of financial time series data for introduction episode of SSFs in Pakistan. The results of CAPM augmented GJR-GARCH process suggest an insignificant change in coefficients used to gauge market inefficiencies, feedback trading, trading volume and volatility. The findings do not support the hypothesis that the introduction of futures markets significantly impacts positive feedback trading and volatility dynamics of underlying stocks. The results are consistent with some of the earlier studies that futures markets have, at least, no destabilizing effect on the underlying stock market.