Abstract
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. JEL Classification : G13, G14, G32 Keywords : Futures Markets, Spot Markets, Volatility, GARCH Models, Emerging Markets DOI : 10.7176/RJFA/10-2-07
Highlights
Stock index futures are perceived as one of the most successful financial innovations of the 1980s
The results suggest that the impacts on the spot market volatility depends on the quality of new information generated by derivatives trading
In this study exponential GARCH (EGARCH) model was employed in order to investigate the impact of index futures on spot market volatility of the Turkish Stock Exchange by using the BIST30 index
Summary
Stock index futures are perceived as one of the most successful financial innovations of the 1980s. Trading based on this financial instrument was first introduced in February 1982 by the Kansas City Board of Trade in the USA and other developed markets soon followed. Borsa İstanbul is one of the fastest growing emerging markets, it was not until 4 Feb. 2005 that a futures contract based on Borsa Istanbul National-30 (BIST 30 Futures) was introduced on the Turkish Derivatives Exchange. After their introduction, trading in these stock index futures increased remarkably. It should be highlighted that in recent years, Borsa Istanbul is taking important steps in order to become a regional hub in accordance with the “İstanbul İnternational Financial Center" project of Turkish Government
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