Abstract
Researchers argue that ignoring the structural breaks in the time-series variance can cause significant upward biases in the degree of persistence in estimated GARCH models. Against this backdrop, the present study empirically examines the effect of stock futures on the underlying stock’s volatility in India by incorporating the structural breaks with the help of ICSS test and AR (1)-GARCH (1, 1) model for 30 most liquid and actively traded underlying stocks and their associated futures contracts. The study period ranges from the 1st January 2000 or the listing date of the particular stock (whichever is prior) till 31st March 2019. The study contributes to the on-going debate regarding the effect of derivatives on the underlying stock market’s volatility in two ways. Firstly, by taking into consideration the breaks in the volatility and, secondly, studying the effect of single stock futures will allow us to evaluate company-specific response to futures trading directly. The study offers a mixed outcome for the stocks under consideration. However, there is evidence of a decline in unconditional volatility for the majority of the stocks. The overall findings indicate that trading in stock futures may not have any detrimental effect on the underlying stock’s volatility.
Highlights
Volatility modeling of the financial asset is one of the critical aspects of economic research as it guides the investors on the risk associated with the investment
The present study empirically examines the effect of stock futures on the underlying stock’s volatility in India by incorporating the structural breaks with the help of Iterative Cumulative Sums of Squares (ICSS) test and AR [1]-GARCH [1, 1] model for 30 most liquid and actively traded underlying stocks and their associated futures contracts
Any consistent patterns were not found in terms of changes in total persistence, unconditional volatility, and α for the underlying stocks for the period after the relevant breaks
Summary
Volatility modeling of the financial asset is one of the critical aspects of economic research as it guides the investors on the risk associated with the investment. Most studies examining the effect of derivatives on the underlying market volatility used some type of GARCH model with dummy variable regressors. Most studies examining the effect of derivatives on the underlying market volatility used some type of GARCH model with dummy variable regressors1 This approach is based on the underlying presumption that any changes detected during the post-derivatives phase are caused by derivatives trading alone. If the structural breaks in variances of the examined time-series are ignored, the degree of persistence of the GARCH model estimate may be significantly biased. The derivatives market and its effect on the un- the sample of 21 European nations by applying derlying market volatility are debated again and the BEKK model and GJR-GARCH. They found again with supporting and countering theories. that the volatility of the underlying market has declined for most of the countries under study
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
