Does the Introduction of Stock Index Futures Effectively Reduce Stock Market Volatility? Is the 'Futures Effect' Immediate? Evidence from the Italian Stock Exchange Using GARCH

Posted: 20 Mar 2012 Last revised: 16 Jun 2018

See all articles by Pierluigi Bologna

Pierluigi Bologna

Bank of Italy

Laura Cavallo

Prime Minister's Office - Department of Economic Affairs

Date Written: March 15, 2012

Abstract

The impact of futures trading on the underlying asset volatility, and its characteristics, is still debated both in the economic literature and among practitioners. The aim of this study is to analyse the effect of the introduction of stock index futures on the volatility of the Italian Stock Exchange. This study mainly addresses two issues: first, the study analyses whether the reduction of stock market volatility showed in the post-futures period, already pointed out in previous research, is effectively due to the introduction of futures contract. Second, whether the 'futures effect', if confirmed, is immediate or delayed with respect to the moment of the futures trading onset is tested. The results show that the introduction of stock index futures per se has led to diminished stock market volatility and no other contingent cause seems to have systematically reduced it. Further, they also suggest that the impact of futures onset on the underlying market volatility is likely to be immediate. These findings are consistent with those theories stating that active and developed futures markets enhance the efficiency of the corresponding spot markets.

Suggested Citation

Bologna, Pierluigi and Cavallo, Laura, Does the Introduction of Stock Index Futures Effectively Reduce Stock Market Volatility? Is the 'Futures Effect' Immediate? Evidence from the Italian Stock Exchange Using GARCH (March 15, 2012). Applied Financial Economics, Vol. 12, No. 3, 2002. Available at SSRN: https://ssrn.com/abstract=2023037

Pierluigi Bologna (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Laura Cavallo

Prime Minister's Office - Department of Economic Affairs ( email )

Via della Mercede 9
00187 Rome
Italy
+39 06 67796634 (Phone)
+39 06 67796663 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
939
PlumX Metrics