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

Abstract

The objective of this study is to enrich the literature by investigating the impact of introduction of index future trading on spot market returns and trading volume in Vietnam. Data used in this study mainly consist of daily VN30-Index and market trading volume series during the period from February 6 th , 2012 to December 31 st , 2019. Using OLS, GARCH(1,1) and EGARCH(1,1) models, the empirical findings consistently confirm that the introduction of index future trading has no impact on the spot market returns. In addition, the results of the EGARCH(1,1) model indicate that the leverage effect on the spot market volatility is existence in HOSE. Specifically, bad news has a greater effect on the market volatility than good news of the same size. Moreover, our empirical findings reveal that the introduction of index future contracts has the positive impact on the underlying market trading volume. Specifically, the trading volume of the post-index futures introduction increases by 7.5 percent compared with the pre-index futures introduction. Finally, the results obtained from the Granger causality test for the relationship between the spot market returns and the future trading activity confirm that only uni-directional causality running from the market returns to the future trading activity exists in HOSE.

The Impact of the Introduction of Index Futures on the Daily Returns Anomaly in the Ho Chi Minh Stock Exchange

“…The disappearance of the daily returns anomaly in the post-index futures sub-period was consistent with the previous empirical findings of Hiraki et al (1998), Kamara (1997), andFaff andMcKenzie (2002) and supported the hypothesis that the introduction of index futures contracts lowers the transactions costs of participants and facilitates their arbitrage opportunities to possibly more efficiently exploit this anomaly in the underlying market. In fact, it was shown that the introduction of index futures contracts had a significantly positive effect on the HOSE trading volume (Nguyen and Truong 2020). Regarding the day-of-the-week effect on the market volatility, the results of EGARCH (1,1) revealed that a significantly positive effect was observed for Monday and Thursday while a negative effect occurred on Friday for the post-futures period.…”

“…In another recent study on the HOSE, Nguyen and Truong (2020) investigated the impact of the introduction of index future trading on spot market returns and trading volume from 6 February 2012 through 31 December 2019. Using OLS, GARCH (1,1) and EGARCH (1,1) models, the authors found that the introduction of index futures trading it had no effect.…”

“…The Although now a market that is experiencing rapid growth, at the first trading session, only two stocks were traded having a total market capitalization of VND 444,000 million (Nguyen and Truong 2020). The growth in the number of listed companies on the Exchange was slow in the beginning.…”

Expiration-Day Effects of Index Futures in a Frontier Market: The Case of Ho Chi Minh Stock Exchange

“…As presented in Table 1, the VN30-Index has been selected as the underlying asset for the index futures contracts in Vietnam. According to Nguyen and Truong (2020), the index futures contract based on the VN30-Index is less risky than individual stocks' future. At a certain time, four different kinds of index futures contracts with different maturity months are traded in the market.…”

Expiration-Day Effects on Index Futures: Evidence from Indian Market

“…Wats (2017) observed that effect was not only confined to expiration day but was extended to entire expiration week. Nguyen and Nguyen (2019) observed that fluctuations in stock yields had a huge effect on futures market volatility due to shocks. Nguyen and Truong (2020) revealed that introduction of derivatives had a positive effect on trading activity of spot market.…”