Does an index futures split enhance trading activity and hedging effectiveness of the futures contract?

Lars Nordén

Journal of Futures Markets, 2006, vol. 26, issue 12, 1169-1194

Abstract: Recently, several stock index futures exchanges have experimented with an altered contract design to make the contract more attractive and to increase investor accessibility. In 1998, the Swedish futures exchange (OM) split the OMX‐index futures contract with a factor of 4:1, without altering any other aspect of the futures contract design. This isolated contract redesign enables a ceteris paribus analysis of the effects of a futures split. The purpose is to investigate whether the futures split affects the futures market trading activity, as well as hedging effectiveness and basis risk of the futures contract. A bivariate GARCH framework is used to jointly model stock index returns and changes in the futures basis, and to obtain measures of hedging efficiency and basis risk. Significantly increased hedging efficiency and lower relative basis risk is found following the split. In addition, evidence of an increased trading volume is found after the split, whereas the futures bid‐ask spread appears to be unaffected by the split. The results are consistent with the idea that the futures split has enhanced trading activity and hedging effectiveness of the futures contract, without raising the costs of transacting at the futures market. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1169–1194, 2006

Date: 2006
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:jfutmk:v:26:y:2006:i:12:p:1169-1194

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().