Spill Over Effects of Futures Contracts Initiation on the Cash Market: A Comparative Analysis

George Karathanassis and Vasilios Sogiakas

MPRA Paper from University Library of Munich, Germany

Abstract: This paper investigates possible spill over effects on the Spot Market due to the initiation of Futures contracts in three different financial markets. According to many analysts there still exists a puzzle regarding the stabilization or destabilization effects of futures contracts. Although the speculative forces (uninformed investors) tend to destabilize the market, rational hedging strategies and the transition of risk allow for stabilization shift. In order to investigate this issue, many researchers during the last decade, have utilized the GARCH framework enriched to capture many stylized financial features, such as the asymmetric response to news and leptokurtosis. However, in this paper the GARCH framework is extended to allow for skewness in the distribution of returns and to examine the timing of possible structural changes, while the conditional mean of the process is adjusted to account for time-varying risk premia and for the day of the week effects decomposition. Furthermore, the distinguishing feature of this paper is the SWARCH econometric model, which enables a dynamic regime shifting through a Markov Chain transition matrix. According to the empirical findings for the UK, Spanish and Greek Capital markets, there exist a significant stabilization effect either in the long run or in the short run, which is negatively associated with the level of efficiency and completeness of these capital markets.

Keywords: Index Futures Contracts; AP-GARCH-M; SWARCH-L (search for similar items in EconPapers)
JEL-codes: C22 C52 C53 G15 (search for similar items in EconPapers)
Date: 2007-11-26
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