Program trading, nonprogram trading, and market volatility

Hogan, Kedreth; Kroner, Kenneth F.; Sultan, Jahangir

doi:10.1002/(sici)1096-9934(199710)17:7<733::aid-fut1>3.0.co;2-o

Cited by 10 publications

(3 citation statements)

References 23 publications

(33 reference statements)

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“…Kyriacou and Sarno (1999) employed the GARCH model to construct a spot market volatility proxy in empirically examining the dynamic relationship between derivatives trading and spot market volatility with daily data for the FTSE index in the United Kingdom. Hogan, Kroner, and Sultan (1997) used the bivariate error correction GARCH model to examine the relationship between program trading and volatility in the S&P 500 cash and futures markets. Tse (1999) used the GARCH model to examine minute-by-minute price discovery and volatility spillovers between the DJIA cash and futures markets.…”

Section: Review Of the Literaturementioning

confidence: 99%

The Introduction of Derivatives on the Dow Jones Industrial Average and Their Impact on the Volatility of Component Stocks

Rahman

2001

Journal of Futures Markets

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This article examines the impact of trading in the Dow Jones Industrial Average (DJIA) index futures and futures options on the conditional volatility of component stocks. It investigates the contention that the introduction of futures and futures options on the DJIA could increase volatility in the 30 stocks comprising the DJIA. The conditional volatility of intraday returns for each stock before and after the introduction of derivatives is estimated with the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model. Estimated parameters of conditional volatility in prefutures and postfutures periods are then compared to determine if the estimated parameters have changed significantly after the introduction of the various derivatives. The results suggest that the introduction of index futures and futures options on the DJIA has produced no structural changes in the conditional volatility of component stocks. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21: 633–653, 2001

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Section: Review Of the Literaturementioning

confidence: 99%

The Introduction of Derivatives on the Dow Jones Industrial Average and Their Impact on the Volatility of Component Stocks

Rahman

2001

Journal of Futures Markets

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“…Distinguishing between program trading and non-program trading activities, associated to S&P 500 index futures market, Hogan, Kroner and Sultan (1997) concluded that futures transactions can, in fact, produce a greater spot volatility. However these authors emphasized the idea that such a volatility increase does not necessarily means less efficient prices.…”

Section: Literature Reviewmentioning

confidence: 99%

Structural Changes of the Conditional Volatility of the Portuguese Stock Market

Oliveira¹,

Armada²

2005

MFJ

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This paper examines the impact of the introduction of the futures market, on the volatility of the underlying Portuguese stock market. The simple analysis of variance is only the first step to a later undertaking of a much more robust methodology which involves the application of a GARCH model, with the main purpose of studying some potential changes on the structure of the conditional volatility of the Portuguese stock market. The results for the Portuguese market are not identical to those generally found internationally. The initial and simple analysis of variance seems to suggest a strong increase in the level of volatility. When a GARCH model is applied, with the main purpose of studying the evolution of the structure of the conditional volatility, a reduction in market efficiency, measured by its ability to quickly incorporate new information, is identified. The replication of the empirical procedures based upon different restricted and consecutive periods of 200 days before and 200 days after of the introduction of PSI-20 index futures market does not, with few exceptions, produce very different conclusions from our initial analysis (JEL: G14, G15).

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“…1 Criticisms of derivative markets are largely based on the argument that derivative trading activity, especially by speculators, destabilizes spot prices and increases price volatility. This may occur, for example, because of uninformed speculators who trade in both derivative and spot markets in search of short-term gains, thus increasing uncertainty and reducing the informational role of prices; alternatively, volatil-1 Influential relevant theoretical contributions are due to-among others- Copeland (1976), Detemple and Selden (1987), Stein (1987), Grossman (1988), and Ross (1989). ity may be exacerbated by arbitrage-related activities-such as program trading-which are typically expected to generate large short-term price swings (for example, see the references in Chung, 1993, andHogan, Kroner, &Sultan, 1997). Arguments of this type often provide the basis to justify regulatory actions as a means to curb speculative positions.…”

Section: Derivatives Trading and Volatilitymentioning

confidence: 99%

The temporal relationship between derivatives trading and spot market volatility in the U.K.: Empirical analysis and Monte Carlo evidence

Kyriacou

Sarno

1999

J. Fut. Mark.

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This article examines empirically the dynamic relationship between spot market volatility, futures trading, and options trading in the context of a trivariate simultaneous equations model. The empirical analysis provides strong evidence that significant simultaneity, in addition to feedback, characterizes the relationship between the proxy for time‐varying spot market volatility and derivative trading. Also, futures trading and options trading are found to affect spot market volatility in opposite directions in the structural model proposed. The results, corroborated by Monte Carlo evidence, suggest that the failure to account for any contemporaneous interaction between the variables under consideration, as well as the omission of any of the two derivatives trading activities examined in this study, may generate serious misspecification and ultimately produce misleading estimation results and statistical inference. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 245–270, 1999

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Program trading, nonprogram trading, and market volatility

Cited by 10 publications

References 23 publications

The Introduction of Derivatives on the Dow Jones Industrial Average and Their Impact on the Volatility of Component Stocks

The Introduction of Derivatives on the Dow Jones Industrial Average and Their Impact on the Volatility of Component Stocks

Structural Changes of the Conditional Volatility of the Portuguese Stock Market

The temporal relationship between derivatives trading and spot market volatility in the U.K.: Empirical analysis and Monte Carlo evidence

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