Spot Market Volatility and Futures Trading: The Pitfalls of Using a Dummy Variable Approach

Martin T. Bohl, Jeanne Diesteldorf, Christian A. Salm and Bernd Wilfling

No 3514, CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster

Abstract: This paper 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 identifes distinct volatility regimes rather than modelling an exogenously defined one-step change in the volatility process. We investigate stock market volatility in France, Germany, Japan, the UK and the US. Our empirical results indicate that index futures trading does neither stabilize nor destabilize the underlying spot market.

Keywords: Stock Index Futures; 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: 27 pages
Date: 2014-10
New Economics Papers: this item is included in nep-fmk, nep-mst and nep-ore
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https://www.wiwi.uni-muenster.de/cqe/sites/cqe/fil ... r/CQE_WP_35_2014.pdf Version of October 2014 (application/pdf)

Related works:
Journal Article: Spot Market Volatility and Futures Trading: The Pitfalls of Using a Dummy Variable Approach (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cqe:wpaper:3514

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