Do Individual Index Futures Investors Destabilize the Underlying Spot Market?

Bohl MT, Salm CA, Wilfling B


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.



Publication type
Forschungsartikel (Zeitschrift)

Peer reviewed
Yes

Publication status
Published

Year
2011

Journal
Journal of Futures Markets

Volume
31

Issue
1

Start page
81

End page
101

Language
English

ISSN
1096-9934

DOI