Do Individual Index Futures Investors Destabilize the Underlying Spot Market?
Martin T. Bohl,
Christian A. Salm and
Bernd Wilfling ()
No 609, CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster
This paper 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 in uence 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 surprisingly suggests that the introduction of index futures trading does not destabilize the spot market. This nding is robust across 3 stock market indices and is corroborated by further analysis of a control group.
Keywords: Individual Investors; Uninformed Trading; Stock Index Futures; Emerging Capital Markets; Stock Market Volatility; Markov-Switching-GARCH Model (search for similar items in EconPapers)
JEL-codes: C32 G10 G14 G20 (search for similar items in EconPapers)
Pages: 31 pages
New Economics Papers: this item is included in nep-fmk and nep-mst
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Journal Article: Do individual index futures investors destabilize the underlying spot market? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:cqe:wpaper:0609
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