Does the Introduction of Index Futures Stabilize Stock Markets? Further Evidence from Emerging Markets

Abstract

We examine how the introduction of index futures affects the stability of stock markets in seven emerging countries (Brazil, Russia, India, China, and South Africa [BRICS] and two countries in Europe, i.e. Poland and Turkey) by studying the existence and the impact of positive feedback trading in both pre- and post-futures periods, using augmented Sentana and Wadhwani’s (1992) feedback model. Consistent with evidence in mature markets before the introduction of index futures, positive feedback traders are already prevalent in six out of the seven markets studied. After the introduction of index futures, signs of positive feedback trading have emerged in only three markets (Poland, South Africa, and Turkey). In contrast to evidence in developed markets, positive feedback traders migrate from spot to futures markets in only three markets (India, Russia, Poland), which suggests that the introduction of index futures may destabilize some emerging stock markets. Another interesting finding is that positive feedback trading is more intense in the majority of the markets (Brazil, China, Russia, and Turkey) during market declines. Overall, the impact of the introduction of index futures on the stability of emerging stock markets is not only different from that of mature markets but also differs among individual emerging markets. We discuss the policy implications of the findings.