Spot Market Volatility and Futures Trading: The Pitfalls of Using a Dummy Variable Approach
Abstract
This study challenges the existing literature examining the impact of the introduction of index futures trading on the volatility of its underlying. To overcome econometric shortcomings of previously published work using the dummy variable approach, we employ a Markov-switching-GARCH technique. This approach endogenously identifies distinct volatility regimes rather than modeling an exogenously defined one-step change in the volatility process.We investigate stock market volatility in France, Germany, Japan, the United Kingdom, and the United States. Our empirical results indicate that index futures trading does neither stabilize nor destabilize the underlying spot market.
Cite as
Bohl, M., Diesteldorf, J., Salm, C., & Wilfling, B. (2016). Spot Market Volatility and Futures Trading: The Pitfalls of Using a Dummy Variable Approach. Journal of Futures Markets, 36(1), 30–45.Details
Publication type
Research article (journal)
Peer reviewed
Yes
Publication status
Published
Year
2016
Journal
Journal of Futures Markets
Volume
36
Issue
1
Start page
30
End page
45
Language
English
ISSN
0270-7314
DOI