TY - JOUR AU - Magweva, Mr. Rabson AU - Munyimi, Mrs. Magret AU - Mbudaya, Mr. Justine PY - 2021/01/20 Y2 - 2024/03/29 TI - Futures trading and the underlying stock volatility: A case of the FTSE/JSE TOP 40 JF - International Journal of Finance JA - IJF VL - 6 IS - 1 SE - Articles DO - 10.47941/ijf.510 UR - https://carijournals.org/journals/index.php/IJF/article/view/510 SP - 1 - 16 AB - <p><strong><em>Purpose:</em></strong> 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.</p><p><strong><em>Methodology:</em></strong> 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.</p><p><strong><em>Findings:</em></strong> The research findings point towards stabilization effects on underlying stock volatility and refute the suggestion that futures markets<em> </em>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.</p><p><strong><em>Unique contribution to theory, policy, and practice: </em></strong>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.<strong><em></em></strong></p> ER -