The volatility effect of single stock futures trading on Pakistani Stock Market (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.
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.
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.
Initiation of Futures Contracts and Volatility -Using Firm-Level Data in Pakistan
CITY UNIVERSITY RESEARCH JOURNAL , 2019
This paper investigates the impact of futures contracts (FC) on volatility of stock prices using firm-level data of Pakistan-Stock-Exchange (PSX) from 1999 to 2015. GARCH model is used in this paper to examine initiation of FC on volatility. The results propose that after the initiation of FC, the stock price volatility of 17 companies stabilizes, whereas the stock price volatility of four companies destabilizes and for the seven companies it does not change. Hence, on average, the findings support the stabilization hypothesis which asserts that introduction of derivatives stabilizes the market. The finding supports the theories that derivative securities expand investors' choices for investment. The results of the study encourage the investors to invest in derivatives and the regulators should encourage derivatives market as it stabilizes the volatility.
In this paper, we examine the possibility of an impact of the resumption of trading in Single Stock Futures (SSFs) on the dynamics (positive feedback trading and price volatility) of the underlying stocks in Pakistan's market. Specifically, we test the hypothesis that trading in SSFs promotes or inhibits positive feedback trading in the spot market. Analyzing SSFs has several advantages over investigation of index futures. First, any impact of futures is more likely to be evident in the behavior of SSFs than index futures. Second, with SSFs it is possible to trade directly in the underlying stocks, and the endogeneity issue can be taken care of by using a relatively weighted portfolio of non-SSFs stocks. The findings of our study suggest that there is a statistically insignificant presence of positive feedback trading in both pre-SSFs period to post-SSFs period for both SSFs-listed stocks and a matching group of non-SSFs stocks. Furthermore, the unconditional volatility has sign...
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...
International Review of Financial Analysis, 2006
This study investigates the impact of LIFFE's introduction of individual equity futures contracts on the risk characteristics of the underlying stocks trading on the LSE. We employ the Fama and French threefactor model (TFM) to measure the change in the systematic risk of the underlying stocks which arises subsequent to the introduction of futures contracts. A GJR-GARCH(1,1) specification is used to test whether the futures contract listing affects the permanent and/or the transitory component of the residual variance of returns, and a control sample methodology isolates changes in the risk components that may be caused by factors other than futures contract innovation. The observed increase (decrease) in the impact of current (old) news on the residual variance implies that futures contract listing enhances stock market efficiency. There is no evidence that futures innovation impacts on either the systematic risk or the permanent component of the residual variance of returns.
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...