Futures trading and the underlying stock volatility: A case of the FTSE/JSE TOP 40
DOI:
https://doi.org/10.47941/ijf.510Keywords:
Heteroscedasticity, persistence, time series, financial markets, newsAbstract
Purpose: This study analyzed the impact of listing and trading futures contracts on the underlying stock index volatility behavior. The FTSE/JSE TOP 40 index was the index of interest.
Methodology: To capture the non-constant variance of the residuals, a modified Generalized Autoregressive Conditionally Heteroscedasticity (GARCH) model was adopted given that financial time series data exhibited ARCH effects. The GARCH model was estimated after dividing the sample period into pre-and post-futures eras.
Findings: The research findings point towards stabilization effects on underlying stock volatility and refute the suggestion that futures markets improve the dissemination of information to the corresponding spot markets. On the same note, the introduction of futures increased the volatility persistence of index returns.
Unique contribution to theory, policy, and practice: This paper applied a modified-GARCH by incorporating a dummy variable to the traditional GARCH model. The study used an emerging economy as a case study which makes the results and conclusions more specific and applicable. On the same note, the study covered the pre-and post-global crisis of 2007/8 in a Sub-Saharan nation. In practice, stock markets are encouraged to introduce futures contracts on highly volatile spot market assets.
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Copyright (c) 2021 Mr. Rabson Magweva, Mrs. Magret Munyimi, Mr. Justine Mbudaya
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