Does the Introduction of Index Futures Stabilize Stock Markets? Further Evidence from Emerging Markets

37 Pages Posted: 15 Jun 2017 Last revised: 7 Jan 2018

See all articles by Ali M. Kutan

Ali M. Kutan

Southern Illinois University at Edwardsville

Yukun Shi

University of Glasgow; University of Leicester

Mingzhe Wei

University of glasgow

Yang Zhao

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development

Date Written: June 14, 2017

Abstract

We examine how the introduction of index futures affects the stability of stock markets in seven emerging countries (Brazil, Russia, India, China, and South Africa [BRICS] and two countries in Europe, i.e. Poland and Turkey) by studying the existence and the impact of positive feedback trading in both pre- and post-futures periods, using augmented Sentana and Wadhwani’s (1992) feedback model. Consistent with evidence in mature markets before the introduction of index futures, positive feedback traders are already prevalent in six out of the seven markets studied. After the introduction of index futures, signs of positive feedback trading have emerged in only three markets (Poland, South Africa, and Turkey). In contrast to evidence in developed markets, positive feedback traders migrate from spot to futures markets in only three markets (India, Russia, Poland), which suggests that the introduction of index futures may destabilize some emerging stock markets. Another interesting finding is that positive feedback trading is more intense in the majority of the markets (Brazil, China, Russia, and Turkey) during market declines. Overall, the impact of the introduction of index futures on the stability of emerging stock markets is not only different from that of mature markets but also differs among individual emerging markets. We discuss the policy implications of the findings.

Keywords: emerging markets, feedback trading, stabilization, stock index futures

JEL Classification: G1; G15

Suggested Citation

Kutan, Ali M. and Shi, Yukun and Wei, Mingzhe and Zhao, Yang, Does the Introduction of Index Futures Stabilize Stock Markets? Further Evidence from Emerging Markets (June 14, 2017). International Review of Economics & Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2986306 or http://dx.doi.org/10.2139/ssrn.2986306

Ali M. Kutan

Southern Illinois University at Edwardsville ( email )

Department of Economics and Finance AH-3141
Edwardsville, IL 62026-1102
United States
618-650-3473 (Phone)
618-650-3047 (Fax)

HOME PAGE: http://https://ideas.repec.org/e/pku30.html

Yukun Shi (Contact Author)

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Mingzhe Wei

University of glasgow ( email )

glasgow, g12 8qq
United Kingdom

Yang Zhao

Central University of Finance and Economics (CUFE) - Chinese Academy of Finance and Development ( email )

39 South College Road
Beijing
China

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