Initiation of Futures Contracts and Volatility -Using Firm-Level Data in Pakistan (original) (raw)
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The Volatility Effect of Single-Stock Futures Trading on the Pakistani Stock Market
Lahore Journal of Business, 2013
The impact of single-stock futures on spot market volatility is still debated in the finance literature. The aim of this study is to analyze the effect of the introduction of single-stock futures on the volatility of the Karachi Stock Exchange (KSE). We examine changes in the level of volatility and structure after the introduction of single-stock futures, evaluating 24 companies listed on the KSE. The study applies the F-test to determine differences in variance as a traditional measure for volatility and uses GARCH (1,1) as an econometric technique for detecting time-varying volatility. The results show that there is no effect on the volatility level but that changes occur in the structure of volatility after stock futures trading.
The volatility effect of single stock futures trading on Pakistani Stock Market
Business Review, 2013
The impact of single stock futures on the spot market volatility is still a issue debated in finance literature. The aim of this study is to analyze the effect of introduction of single stock futures on the volatility of Karachi Stock Exchange. This study mainly addresses the changes in level of volatility and structure after the introduction of single stock futures. Twenty four companies listed on KSE were evaluated in terms of possible volatility effect due to stock futures trading. This study applied F-test for differences in variances as a traditional measure for volatility and GARCH(1,1) as a econometric technique for detecting time-varying volatility. The results showed that there was no effect on volatility level and changes were experienced with structure of volatility after stock futures trading.
While the issue of the effect of stock index futures trading on the volatility of the underlying asset has been extensively examined in finance literature, the Single Stock Futures (SSFs) being relatively newer derivative products have not received much attention in the finance literature. Given the distinctive features of SSFs, this market provides an important opportunity to examine a number of issues that have not been adequately addressed in the literature, particularly in the emerging markets. This paper examines the SSFs contract trading on the Karachi Stock Exchange and investigates the changes in the return volatility of the underlying stocks using an augmented GJR-GARCH model as well the more traditional measures of return volatility. Overall, we find mixed results for both the SSFs-listed stocks and the sample of control group stocks in terms of changes in volatility of daily stock returns in the post-futures periods using traditional measures of return volatility as well as the econometric investigations. Hence, indictments of single stock futures as having caused changes in the return volatility of the underlying stocks cannot be made.
Futures Trading and Its Impact on Volatility of Indian Stock Market
Asian Journal of Finance & Accounting, 2013
Derivative products like futures and options are important instruments of price discovery, portfolio diversification and risk hedging. This paper studies the impact of introduction of index futures on spot market volatility on S&P CNX Nifty using Bi-Variate E-GARCH technique. The evidence of this model shows that the volatility spillover between spot and futures markets is uni-directional from spot to futures and spot market dominates the futures market in terms of return and volatility. The volatility persistence and clustering is found to be significant and bidirectional at 5 % level of significance. At the practical level, a better understanding of the mean and variance dynamics of the spot and futures market can improve risk management and investment decisions of the market agents. The findings have implications for policy makers, hedgers and investors. The research contributes to literature for emerging markets such as India.
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...
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.
Futures trading and the underlying stock volatility: A case of the FTSE/JSE TOP 40
International Journal of Finance and Accounting, 2021
Purpose: This study analyzed the impact of listing and trading futures contracts on the underlying stock index volatility behavior. The FTSE/JSE TOP 40 index was the index of interest. Methodology: To capture the non-constant variance of the residuals, a modified Generalized Autoregressive Conditionally Heteroscedasticity (GARCH) model was adopted given that financial time series data exhibited ARCH effects. The GARCH model was estimated after dividing the sample period into pre-and post-futures eras. Findings: The research findings point towards stabilization effects on underlying stock volatility and refute the suggestion that futures markets improve the dissemination of information to the corresponding spot markets. On the same note, the introduction of futures increased the volatility persistence of index returns. Unique contribution to theory, policy, and practice: This paper applied a modified-GARCH by incorporating a dummy variable to the traditional GARCH model. The study u...
Derivative Trading and Spot Market Volatility: Evidence from Indian Market
International Journal Of Innovation And Economic Development, 2015
The present study tries to estimate the effect of introduction of individual stock derivatives on the underlying stock volatility in Indian stock market. To estimate the effect of introduction of derivatives on stock market, GARCH family models which are known for their ability to model volatility. The return series of the ten companies were tested using methods like, unit root test and descriptive statistics to confirm that GARCH models could be used. Using these models, the asymmetric nature of stock returns and the volatility of stock returns on the introduction of derivatives are checked. The results reveal that the introduction of derivatives has decreased the volatility of the underlying stock returns. It was also found that most of the stock returns show asymmetric behaviour.