Premium
Do individual index futures investors destabilize the underlying spot market?
Author(s) -
Bohl Martin T.,
Salm Christian A.,
Wilfling Bernd
Publication year - 2011
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20460
Subject(s) - futures contract , economics , volatility (finance) , futures market , spot market , financial economics , stock index futures , index (typography) , stock market index , econometrics , stock market , markov chain , autoregressive conditional heteroskedasticity , spot contract , electricity , world wide web , computer science , paleontology , horse , machine learning , electrical engineering , biology , engineering
Abstract This study investigates the impact of introducing index futures trading on the volatility of the underlying stock market. We exploit a unique institutional setting in which presumably uninformed individuals are the dominant trader type in the futures markets. This enables us to investigate the destabilization hypothesis more accurately than previous studies do and to provide evidence for or against the influence of individuals trading in index futures on spot market volatility. To overcome econometric shortcomings of the existing literature we employ a Markov‐switching‐GARCH approach to endogenously identify distinct volatility regimes. Our empirical evidence for Poland suggests that the introduction of index futures trading does not destabilize the spot market. This finding is robust across three stock market indices and is corroborated by further analysis of a control group. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:81–101, 2011