THE EFFECT OF FUTURES CONTRACTS ON THE STOCK MARKET VOLATILITY: AN APPLICATION ON ISTANBUL STOCK EXCHANGE

Abstract

The deregulation and financial liberalization have caused the increase of price volatility, interest and exchange rate risks. Managers and investors have started using derivatives to manage their risks. Since derivatives markets interact continuously with spot markets, the effect of derivatives markets on spot market volatility has become an important research topic.  In this study, the impact of the derivatives markets on the Turkish spot market volatility and liquidity has been examined from January 2001 to December 2014 period.  For this purpose, the impact of these futures contracts on spot market volatility and liquidity has been examined using EGARCH model and ARMA model respectively. It is found that derivatives markets reduce the spot market volatility and that they do not have a significant effect on the volume of the spot market.  Furthermore, it is found that while an unexpected future trading volume increase the spot market volatility, an expected future trading volume does not have a significant impact on the spot market volatility.

Keywords

• Futures market,spot market volatility,EGARCH Model,ARMA Model

References

1. Alexakis, P. 1995, “ On the Effect of Index Futures Trading on Stock Market Volatility”. International Research Journal of Finance &Economics, 11, pp. 7–20.
2. Antoniou, A., Holmes, P. 1995, “Futures Trading, Information and Spot Price Volatility: Evidence for the FTSE-100 Stock Index Futures Contract Using GARCH”. Journal of Banking and Finance, vol. 19, no. 1, pp. 117– 129.
3. Antoniou, A., Holmes, P. & Priestley, R. 1998, “The Effects of Stock Index Futures Trading on Stock Index: An Analysis of the Asymmetric Response of Volatility to News”. The Journal of Futures Markets, vol. 18, no. 2, pp. 151- 166.
4. Arisoy, Y.E. 2008. ” Index Futures, Spot Volatility, and Liquidity: Evidence from FTSE Xinhua A50 Index Futures”. Working Paper. European Financial Management Association.
5. Bae, S.C., Kwon, T.H. & Park, J.W. 2004. “Futures Trading, Spot Market Volatility and Market Efficiency: The Case of the Korean Index Futures Markets”. The Journal of Futures Markets, vol. 24, no. 12, pp. 1195-1228.
6. Bessembinder, H., Seguin P.J. 1992. “Futures-Trading Activity and Stock Price Volatility”. The Journal of Finance, vol. 47, no. 5 , pp. 2015- 2034.
7. Black, F. 1976. “Studies of Stock Market Volatility Change”, Proceedings from the American Statistical Association. Business and Economics Statistics, pp. 177-181.
8. Board, J., Sandmann, G. and Sutcliffe, C. 2001. “The Effect of Futures Market Volume on Spot Market Volatility”. Journal of Business Finance and Accounting, vol.28, no. 7-8, pp. 799-820.

9. Bologna, P., Cavallo, L. 2002. “Does the Introduction of Stock Index Futures Effectively Reduce Stock Market Volatility? Is The Futures Effect Immediate? Evidence from the Italian Stock Exchange Using GARCH”. Applied Financial Economics, vol. 12, no. 3, pp. 183-192.
10. Bohl, M.T. Salm, C.A and Wilflind, B. 2011. “Do Individual Index Futures Investors Destabilize the Underlying Spot Market?” The Journal of Futures Markets,vol. 31, no 1, pp. 81–101.
11. Bollerslev, T. 1986. “Generalized Autoregressive Conditional Heteroscedascity”. Journal of Econometrics, vol. 31, pp. 307-327.
12. Boyer, C.M., Popiela, E.M. 2004. “Index Futures and Stock Price Volatility. Derivatives Use”, Trading & Regulation,vol. 9, no 4, pp.351–364.
13. Butterworth, D. 2004. “The Impact of Futures Trading on Underlying Stock Index Volatility: The Case of the FTSE Mid 250 Contract”. Applied Economics Letters, vol 7, pp. 439-442.
14. Campbell, J., Lettau, M., Malkiel, B. & Xu, Y. 2001. ” Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk”. Journal of Finance, vol. 56, pp. 1- 43.
15. Chance, D., Brooks, R. 2013. An Introduction to Derivatives and Risk Management. Boston: Cengage Learning.
16. Çağlayan, E. 2011. “The Impact of Stock Index Futures on the Turkish Spot Market”. Journal of Emerging Market Finance, vol. 10 no 1, pp. 73- 91.
17. Darrat, A.F., Rahman, S. 1995. ” Has Futures Trading Activity Caused Stock Price Volatility?” Journal of Futures Markets, vol. 15, pp. 537–57. Diesteldorf, J. Bohl, M.T & Pierre L.S. 2014. “ The Effect of Index Futures Trading on Volatility Three Markets for Chinese Stocks”. CIGI Papers, 1, pp. 81–101.
18. Drimbetas, E. Sarianmidis, N. & Porfiris N. 2007. ” The Effect of Derivatives Trading on Volatility of the Underlying Asset: Evidence from the Greek Stock Market”. Applied Financial Economics, vol. 17, 139–148.
19. Engle, R.F. 1982. “Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom İnflation”. Econometrica, vol. 50, no. 4, pp. 987-1007.
20. Engle, R.F. 2001. “GARCH 101: The Use of ARCH/GARCH Models in Applied Econometrics”. Journal of Economic Perspectives, Vol. 14, no. 4, pp. 157-168.
21. Gentile, T., Fontanills, G.A. 2001. The Stock Market Course. New York: John Wiley & Sons
22. Gülen, H., Mayhew, S. 2000. “Stock Index futures trading and volatility in international equity markets”. The Journal of Futures Markets, vol. 20, pp. 661-685.
23. Gülen, H., Derindere K.S. & Atakan T. 2009. “The Effect of the Stock Index Futures to the Spot Stock Market: A Study for the Istanbul Stock Exchange”. Istanbul University, Journal of the School of Business Administration, vol. 38, no. 1, pp. 84-100.
24. Hull, J.C. 2009. Options Futures and Others Derivatives. New York: Prentice Hall.
25. Illueca, M., Lafuente, J. A 2003. “The Effect of Spot and Futures Trading on Stock Index Volatility: A Non-parametric Approach”. Journal of Futures Markets, vol. 23, no 9, pp. 841–858.
26. Jorion, P. 2005. Financial Risk Manager-Handbook. Canada: John Wiley & Sons.
27. Kasman, A. , Kasman, S. 2008. “The Impact of Futures Trading on Volatility of the Underlying Asset in the Turkish Stock Market”. Physic A: Statistical Mechanics and its Applications, vol. 387, no 12, pp. 2837–2845.
28. Kolb, W.R., Overdahl A. 2003. Financial Derivatives. New Jersey: John Wiley and Son Incorporation.
29. Konishi A., Dattatreya R.E. 1991. The Handbook of Derivative Instruments. Illinois: Probus Publishing Company.
30. Korkmaz, T., Ceylan, A. 2006. Sermaye Piyasası ve Menkul Değer Analizi. Bursa: Ekin Kitabevi.
31. Kumar, K.K., Mukhopadyay, C. 2007. “Impact of Futures Introduction on Underlying Index Volatility: Evidence from India”. Journal of Management Science, vol. 1, no 1, pp. 27-43.
32. Matanobic, E. and Wagner H. 2012. “Volatility Impact of Stock Index Futures Trading-A Revised Analysis”. Journal of Applied Finance and Banking, vol. 2, no 5, pp. 113–126.
33. McDonald, R.L. 2006. Derivatives Markets. New Jersey: Pearson Education.
34. McKenzie, M.D., Brailsford, T.J. & Faff, R.W. 2001. “New Insights into the Impact of the Introduction of Futures Trading on Stock Price Volatility”. Journal of Futures Markets, vol. 21, no 3, pp. 237–255.
35. Nelson, D.B. 1991. “Conditional Heteroskedasticity in Asset Returns: A new Approach”. Econometrica, vol. 59, no 2, pp. 347-370.
36. Pilar, C., Rafael, S. 2012.” Does Derivatives Trading Destabilize the Underlying Assets? Evidence from the Spanish Stock Market”. Applied Economics Letters, vol. 2, no 5, pp. 113–126.
37. Rahman, S. 2001. “The Introduction of Derivatives on the Dow Jones Industrial Average and Their Impact on the Volatility of Component Stocks”. Journal of Futures Markets, vol. 21, no 7, 633–653.
38. Reyes, G.M 1996. ” Index Futures Trading and Stock Price Volatility: Evidence from Denmark and France”. Journal of Economics and Finance, vol. 20, no 3, pp. 81–88.
39. Robbani, M.G., Bhuyan, R.2005.” Introduction of Futures and Options on a Stock Index and their Impact on the Trading Volume and Volatility: Empirical evidence from the DJIA components”. Derivatives Use, Trading and Regulation, vol. 11, no 3, pp. 246-260.
40. Sarangi, S.P., Patraik, K.U.S. 2006. “Impact of Futures and Options on the Underlying Market Volatility: An Empirical Study on S and P CNX Nifty Index”. 10th Indian Institute of capital Markets Conference Paper, SSRN.
41. Shenbagaraman, P.2003. “Do Futures and Options Trading Increase Stock Market Volatility?”, NSE Research Initiative Paper, 20, pp. 1-13
42. Spyrou, S. I. 2005. “Index Futures Trading and Spot Price Volatility: Evidence from an Emerging Market”. Journal of Emerging Market Finance, vol. 4, no 2, pp. 151-167.
43. Xie, S., Huang, J. 2014. « The Impact of Index Futures on Spot Market Volatility in China. Emerging Markets” Finance and Trade, vol. 50, no 1, pp. 167-177.
44. Yu, S.W. 2001. “Index Futures Trading and Spot Price Volatility”. Applied Economics Letters, 8, pp. 183-186.