THE IMPACT OF THE LEVERAGE PROVIDED BY THE FUTURES ON THE PERFORMANCE OF TECHNICAL INDICATORS: EVIDENCE FROM TURKEY

Abstract

Although in developed countries the futures markets have been in existence since mid-nineteenth century, they are relatively new in the developing countries. In the late twentieth and early twenty first century, many new futures exchanges were established in developing countries and in the majority of these newly established exchanges substantial growth in futures trading have been observed within a small period of time. This fast growth in the futures trading volume was mainly due to the tremendous leverage the futures provides to speculators. Thanks to futures margining system, by committing only a small fraction of the money needed to maintain a position on the underlying security in the spot market, a speculator can attain a much higher return potential by buying or selling a futures contract. This paper studies this effect by employing daily return data on 19 selected stocks listed continuously in IMKB-30 (Istanbul Stock Exchange 30, Turkey) from January 2005 to December 2010. Popular technical indicators are used to generate buy and sell signals in both the spot market (Istanbul Stock Exchange) and the futures market (VOB, a fast growing derivatives exchange located in İzmir, Turkey). The profit/loss resulting from trading strategies are then calculated and compared. The results of the study show that, although the amount invested in both markets is the same, the profit generated from the strategies applied on futures is significantly higher than that on spot market. A CAPM (Capital Asset Pricing Model) based hedge ratio is used to apply the trading strategies generated from spot market data on futures. The results show that this strategy generates superior returns in the futures market.

Keywords

• Leverage Effect, Futures, Derivatives, Technical Indicators, CAPM Derivatives in Emerging Markets, Turkish Derivatives Market

References

1. Bessembinder, H. and Chan, K. (1995), "The Profitability of Technical Trading
2. Rules in the Asian Stock Markets", Pacific-Basin Finance Journal, Vol. July, pp.257-284. Brock, W., J. Lakonishok, and B. LeBaron, (1992), "Simple Technical Trading
3. Rules and the Stochastic properties of Stock Returns," Journal of Finance, Vol. June, pp. 1731-1764.
4. Cheung, Yin-Wong, CYP Wong (2000), “A survey of market practitioners' views on exchange rate dynamics” , Journal of International Economics, Vol. 51, No. 2, pp. 401-419.
5. Cheung, Yin-Wong, D. Chinn Menzie and Ian W. Marsh (2004), “How do UK
6. Based Foreighn Exchange Dealers Think Their Market Operates?”, International Journal of Finance & Economics, Vol. 9, No. 4, pp. 289 – 306. Fama, E. and Blume, M. (1966), "Filter Rules and Stock Market Trading Profits,"
7. Journal of Business, Vol. April, pp. 226-241. Fama, Eugene F. (1970), “Efficient Capital Markets: A Review of Theory and Empirical Work”, The Journal of Finance, Vol. 25, No.2, pp. 383-417.
8. Gehrig, Thomas, Lukas Menkhoff (2005), “The Rise of Fund Managers in

9. Foreign Exchange:Will Fundamentals Ultimately Dominate?”, World Economy, Vol. 28, No. 4, pp. 519-540. Gehrig, Thomas, Lukas Menkhoff (2006), “Extended Evidence on the Use of
10. Technical Analysis in Foreign Exchange”, International Journal of Finance and Economics, Vol. 11, pp. 327-338. Jensen, Michael C. (1978), “Some Anomalous Evidence Regarding Market
11. Efficiency”, Journal of Financial Economics, Vol. 6, No. 2/3, pp. 95-101. Lintner, J., (1965), “The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets”, Review of Economics and Statistics, Vol. 47, pp. 13–37.