The Impact of Futures Trading Over Spot Market Intraday Volatility: Evidence From an Emerging Market, Borsa Istanbul

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