In this article, the effects of the introduction of the futures and options into the FTSE/ASE 20 index on the volatility of the underlying index are studied. This particular issue is quite controversial since contradictory results have been found in various markets. Analysing the data (August 1997–April 2005) with the help of an EGARCH model it is shown that the introduction of derivatives has induced a reduction of the conditional volatility of the FTSE/ASE20 index and consequently it has increased its efficiency.

The effect of derivatives trading on volatility of the underlying asset: evidence from the Greek stock market

This paper examines the impact of the introduction of stock index futures on the volatility of the Istanbul Stock Exchange (ISE), using asymmetric GARCH model, for the period July 2002–October 2007. The results from EGARCH model indicate that the introduction of futures trading reduced the conditional volatility of ISE-30 index. Results further indicate that there is a long-run relationship between spot and future prices. The results also suggest that the direction of both long- and short-run causality is from spot prices to future prices. These findings are consistent with those theories stating that futures markets enhance the efficiency of the corresponding spot markets.

The impact of futures trading on volatility of the underlying asset in the Turkish stock market

This article contributes to the debate whether the introduction of derivative instruments stabilises or destabilises markets for underlying assets. It has often been argued that due to the higher degree of leverage, futures markets tend to attract uninformed speculative investors and thus destabilise cash markets by increasing volatility. On the other hand, it has been pointed out that futures markets increase the overall market depth and informativeness, are important for price discovery, allow the transfer of risk, and may actually reduce spot volatility. The empirical evidence is controversial and has been concentrated on large capitalisation markets. This paper investigates the issue for a dynamic emerging market, the Athens Stock Exchange, employing a methodology that allows the examination of changes in the nature of volatility rather than changes in volatility per se, and allowing for asymmetric responses to news. To anticipate the results, spot volatility appears unaffected with some evidence to s...

Index Futures Trading and Spot Price Volatility Evidence from an Emerging Market

Bad news and Dow Jones make the Spanish stocks go round

This paper examines the relationship between trading volume and returns in Greek stock index futures market. For both available stock index futures contracts of the Athens Derivatives Exchange (ADEX), we study GARCH effects in our data and test how well these effects are explained by trading volume (under both GARCH and GMM). For FTSE/ASE-20, trading volume contributes significantly in explaining GARCH effects. However, GMM system estimation suggests that there is a significant relationship between lagged volume and absolute returns, while a positive contemporaneous relationship does not hold. Taken together, these findings indicate that market participants use volume as an indication of prices. For FTSE/ASE Mid 40, the empirical results give different conclusions. Both GARCH and GMM methods confirm that there is no evidence of positive relationship between trading volume and returns. These findings are helpful to financial managers dealing with Greek stock index futures.

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Trading volume and returns relationship in Greek stock index futures market: GARCH vs. GMM

This paper analyses the effect of the introduction of derivatives (futures and options) in the Spanish market on the volatility and on the trading volume of the underlying index. The period analysed covers from October 1990 to December 1994. To study this effect, a GJR model is used. It is found, that although the asymmetry coefficient has increased, the conditional volatility of the underlying index declines after derivative markets are introduced. The trading volume of Ibex-35 increases significantly. Consequently, the introduction of the derivative contracts in Spain confirms a decrease in uncertainty in the underlying market and an increase in liquidity, which possibly enhances their efficiency.

Corredor Pilar

Papers

Does derivatives trading destabilize the underlying assets? Evidence from the Spanish stock market