Abstract
In this study, the researcher has undertaken an analysis to establish whether the introduction of stock futures trading influences the volatility of the underlying stock or not. In order to establish this, the researcher has taken eight companies into consideration which belongs to four different sectors such as pharmaceuticals, Banking, Oil and Gas and Fast Moving Consumer Goods sector. The researcher has taken a reference period of fourteen years which is sub-divided into two sub-groups namely pre-derivatives period, comprises of seven years from 1995-2001 and post-derivatives period, comprises of seven years from 2002-2008. The findings put forth by the study confirms increased volatility during the post-derivatives period compared to pre-derivatives period. These findings collaborates with the findings of Lee and Oak (1992), Bechetti and Robert (1999) and Kamara et.al (1992).
Highlights
Volatility signifies the pace at which stock prices move higher and lower and if a stock is more volatile, it is implied that it is more risky as well
The post-derivatives period in the first year records the level of volatility at 40.43 mark in terms of standard deviation. This is followed by a substantial increase in the subsequent year by 156.54%, touching 103.49 mark. This upward trajectory continues in the third year of the pre-derivatives period in which the level of volatility touches 110.19 mark, increasing by 6.47%.The fourth year continues with this upward movement by registering a further rise in the level of volatility by 88.08% that pushes up the volatility level to 636.11 mark in terms of standard deviation which stands as the highest level of volatility throughout the postderivatives period
The level of volatility witnesses a substantial decline in the subsequent year by 92.54%, touching 15.46 mark which is followed by a further fall by 5.56%, which pushes down the level of volatility to 14.60 mark in terms of standard deviation that stands as the lowest level of volatility throughout the post derivatives period .The last year of the post-derivatives period registers an increase by 26.30% that takes the level of volatility to 18.44 mark
Summary
Volatility signifies the pace at which stock prices move higher and lower and if a stock is more volatile, it is implied that it is more risky as well. One must underscore that futures exchanges are adept at price discovery and dissemination of price information This growing importance of derivatives in the present capital markets has made various researchers around the world to undertake the studies so as to determine its real impact on the various aspects of the capital market. The sample of the study comprised five significant international index futures markets, such as, All Ordinaries Share Index (Sydney), Hang Seng (Hong Kong), NIKKEI (Tokyo), FTSE- 100 (London) and VLCI (New York) The findings they come up with, demonstrate that there is an increase in the spot market volatility following the introduction of NIKKEI, FTSE- 100 and VLCI Futures Contracts. Antonios Antonion and Phil Holmes (1995) undertake the study to examine the impact of trading in FTSE-100 stock index futures on the volatility of the underlying (spot market).
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