The Role of Futures Trading in Spot Market Fluctuations: Perpetrator of Volatility or Victim of Regret?

Posted: 27 Aug 2001

See all articles by Ali F. Darrat

Ali F. Darrat

Louisiana Tech University - College of Business

Shafiqur Rahman

Portland State University - School of Business Administration

Maosen Zhong

University of Queensland - Business School

Abstract

We examine the role of index futures trading in spot market volatility. We use the exponential generalized auto-regressive conditional heteroskedasticity (EGARCH) approach to measure volatility, analyze causality and feedback relations between volatilities in the spot and futures markets, and test various hypotheses in the context of a multivariate model that incorporates other macrostate variables. Our empirical results suggest index futures trading may not be blamed for the observed volatility in the spot market. Rather, we find stronger and more consistent support for the alternative posture that volatility in the futures market is an outgrowth of a turbulent cash market. We use the regret (cognitive dissonance) theory to explain our results.

Keywords: futures trading, spot market volatility, exponential GARCH, regret theory

Suggested Citation

Darrat, Ali F. and Rahman, Shafiqur and Zhong, Maosen, The Role of Futures Trading in Spot Market Fluctuations: Perpetrator of Volatility or Victim of Regret?. Available at SSRN: https://ssrn.com/abstract=271259

Ali F. Darrat (Contact Author)

Louisiana Tech University - College of Business ( email )

Department of Economics & Finance
P.O. Box 10318
Ruston, LA 71272
United States
318-257-3874 (Phone)
318-257-4253 (Fax)

Shafiqur Rahman

Portland State University - School of Business Administration ( email )

Portland, OR 97207-0751
United States

Maosen Zhong

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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