Determinants of Price Volatility of Futures Contracts: Evidence from an Emerging Market (original) (raw)
Related papers
2013
The volatility of the futures prices is of crucial importance to all participants in the market, especially in the emerging markets like TurkDEX, the newly established derivatives market, where the high volatility of foreign exchange rates can be usually observed. This paper aims to analyze the determinants of the volatility of the US Dollar and Euro futures contracts that are traded in TurkDEX using daily data of closing price, the contract maturity, the volume of contracts traded, and the volume of open interest of each contract. The paper tests the models of individual effects of futures price volatility determinants on the basis of EGARCH(1,1) process and analyzes empirically the relationship of futures price volatility and time to maturity and trading volume and open interest for the period January 5, 2007 to December 28, 2012. The results show that the Turkish Derivatives Exchange deviates from the other developed markets in terms of the determinants affecting the futures price volatility, due to its infancy.
The issue that futures-trading activity may result in excessive equity volatility has attracted much attention, both academic and regulatory. Many academicians have claimed that the introduction of the futures contracts will lead to an increase in the spot market volatility and destabilize the equity prices. This has also been an important concern for regulators. Many others have argued the contrary and claimed that futures trading will have stabilizing effects on spot prices. There is no theoretical answer that will resolve this debate; proper empirical investigation will give insights on this effect. Many previous empirical studies deal with the developed markets, especially with the US. The number of studies employing emerging market data is quite limited and there are only a handful of studies dealing with the Turkish market. In this study we examine the effect of futures trading on index volatility using the data from an important emerging market: Turkey. Using the Istanbul Stock Exchange 30 (ISE 30) Index data between February 2005 and April 2015, we test the hypothesis that the variance of daily returns in the futures expiration period (9 days before the expiration of the futures contract) is greater than the variance of index returns in the pre-expiration period (10-50 days prior to futures expiration date). The results of the study show that expiration period variance is not greater than pre-expiration variance.
Pressacademia, 2015
ABSTRACT The issue that futures-trading activity may result in excessive equity volatility has attracted much attention, both academic and regulatory. Many academicians have claimed that the introduction of the futures contracts will lead to an increase in the spot market volatility and destabilize the equity prices. This has also been an important concern for regulators. Many others have argued the contrary and claimed that futures trading will have stabilizing effects on spot prices. There is no theoretical answer that will resolve this debate; proper empirical investigation will give insights on this effect. Many previous empirical studies deal with the developed markets, especially with the US. The number of studies employing emerging market data is quite limited and there are only a handful of studies dealing with the Turkish market. In this study we examine the effect of futures trading on index volatility using the data from an important emerging market: Turkey. Using the Istanbul Stock Exchange 30 (ISE 30) Index data between February 2005 and April 2015, we test the hypothesis that the variance of daily returns in the futures expiration period (9 days before the expiration of the futures contract) is greater than the variance of index returns in the pre-expiration period (10-50 days prior to futures expiration date). The results of the study show that expiration period variance is not greater than pre-expiration variance
Research Journal of Finance and Accounting
The objective of this article is to examine the impact of stock index futures on stock markets. Of particular interest is the evidence for change in overall volatility and liquidity after the introduction of stock index futures. The impact of derivatives trading on price volatility in the underlying spot market return is examined using the exponential GARCH (EGARCH) model which was proposed by Nelson (1991). Our empirical findings support the view that introducing futures trading decreases volatility in the spot market and the speed with which market information is reflected in spot market prices. However, volatility persistence increased in the post-futures period. In the light of these findings it can be said that the speed and nature of information differ between pre-futures period and post-futures period.
Realized volatility in the futures markets
Journal of Empirical Finance, 2003
Using intraday returns on four futures contracts over a 5-year period, we calculate and analyze model-free measures of futures return volatility. We focus on the temporal characteristics and distributional properties of daily returns, return volatilities, (log of) standard deviations, standardized returns and pairwise correlations. The behavior of a number of tests for Gaussianity under long memory is explored via a simulation study. The simulation results indicate that tests of the ''goodness-of-fit'' variety are appropriate to use while the commonly employed Jarque -Bera test is severely oversized and its use is not recommended. We find that the standard deviations and the pairwise correlations exhibit long memory while the standardized returns are serially uncorrelated. We also find that the (unconditional) distributions of daily returns' volatility are leptokurtic and highly skewed to the right while the distributions of the standardized returns, the standard deviations and the pairwise correlations are statistically indistinguishable from the Gaussian distribution. Our results are consistent with that of Andersen et al. [Journal of the American Statistical Association 96 (2001a) 42; Journal of Financial Economics 61 (2001c) 43] on the time-series properties of realized volatility. The dynamic characteristics of the volatility series are modelled using fractionally integrated ARMA models. D
The Effect of Futures Trading on Spot Price Volatility: Evidence for Brent Crude Oil Using Garch
Journal of Business Finance & Accounting, 1992
There has been widespread interest in the effects of futures trading on prices in the underlying spot market. It has often been claimed that the onset of derivative trading will destabilize the associated spot market and so lead to an increase in spot price volatility there. Others have argued to the contrary, stating that the introduction of futures trading will stabilize prices and so lead to a decrease in price volatility. It has been suggested,' however, that the debate cannot be resolved wholly on a theoretical level and so should be analyzed by empirical investigation.
Time-Varying Volatility in Canadian and U.S. Stock Index Futures Markets: A Multivariate Analysis
SSRN Electronic Journal, 2000
We use a multivariate generalized autoregressive heteroskedasticity model (M-GARCH) to examine three stock indexes and their associated futures prices: the New York Stock Exchange Composite, Standard and Poor's 500, and Toronto 35. The North American context is significant because markets in Canada and the United States share similar structures and regulatory environments. Our model allows examination of dependence in volatility as it captures time variation in volatility and cross-market influences. Estimated time-variation in volatility is significant, and the volatilities are highly positively correlated. Yet, we find that the correlation in North American index and futures markets has declined over time.
Volatility Impact of Stock Index Futures Trading - A Revised Analysis
The recent financial crisis revealed some serious shortcomings in over-the-counter (OTC)-derivatives markets and renewed concerns about a possible destabilizing impact of derivatives trading in general and OTC derivatives trading in particular on financial market stability. In order to strengthen transparency in OTC derivatives markets and deploy presumed advantages of classic derivatives trading the implication of a central counterparty and exchange-based trading is highly recommended for these derivatives. However, this desirable stabilizing and volatility-reducing impact of classic, regulated derivatives trading has been questioned on theoretical grounds, and empirical findings are still inconclusive. The present contribution aims to show that by appropriately rectifying some methodological shortcomings of previous studies a stabilizing impact of derivatives trading can be demonstrated very well. This paper analyzes the volatility impact of DAX futures trading using the GARCH fra...