Gains and Costs Associated with Resumption of SSFs with Stringent Regulations: A Modified Approach

Abstract

To curb the negative effects of Global Financial Crisis (GFC) in 2008, the regulatory bodies of Pakistan Stock Exchange (PSX) banned trading in the stock market. Trading in several financial instruments suffered due to this unavoidable situation. On the recommendations of CFS MK II review committee, trading in futures markets were also halted. As the situation got better, trading in the stock market resumed. With this, trading in Single Stock Futures (SSFs) resumed on July 27, 2009 with stringent regulatory requirements than before. This situation makes it important to investigate the role of newer SSFs with stringent regulations. This study investigates the stakeholders’ claims on destabilizing ability of futures markets in this crucial stage. This is done by examining the impact of resumption of trading in SSFs contracts with stringent regulations on the market efficiency and volatility of the stock prices of the underlying counterparts. The results of this study do not present any significant change in the market efficiency and volatility of SSFs’ underlying stocks and Non-SSFs’ stocks. This study has two implications. First, the SSFs did not play any part in destabilization of Pakistan’s Stock market during GFC. Second, the stringent regulations have helped mitigate the destabilizing ability of futures markets in Pakistan.

Keywords: SSFs, DME, ARIMA-EGARCH, Normal, Student’s t, GED