The world’s first stock index futures contract was the Value Line contract,
introduced by the Kansas City Board of Trade on February 24, 1982.
Today, stock index futures and options trade in markets all over the world,
with new contracts launched nearly every year. Table 1 reports launch
dates for thirty nations that introduced stock index futures between 1982
and January, 1998. In addition, plans are underway for exchange-listed
index futures in many other nations, including India, Indonesia, Czech
Republic, Slovakia, Turkey, and others.
As exchange-traded stock index futures and other derivatives become
more pervasive in the world’s financial markets, it is increasingly important
to understand the effect of derivatives trading on the underlying
markets. The previous literature on the effects of stock index futures
trading has focused primarily on developed markets, and it is unclear to
what extent these results are applicable to less-developed markets. Moreover,
the existing research has come to conflicting conclusions regarding
the effect of futures trading on volatility. While some authors have found
that volatility appears to increase with the introduction of futures, others
have found no significant effect, and still others have found that volatility
decreases.1
In this site, we examine the time series properties of stock indexes
in twenty-five countries in order to investigate the impact of stock index
futures listing and subsequent trading activity on the volatility structure
of the underlying cash market.We examined this issue in two ways. First,
we tested for structural changes at the time of futures listing by comparing
properties of the returns series before and after listing. Second, we
tested whether volatility in the post-listing period is related to futures
market volume and open interest. The results of both tests showed that
futures trading is associated with increased volatility in the United States
and Japan, but this was not the case in virtually every one of the other
twenty-three countries. In some countries, there is no robust, significant
effect, and in many others, futures trading is associated with lower
volatility.
pointed out by Hodges (1992), Mayhew (1999), and others, most of these
theories predicted that volatility can increase or decrease with the introduction
of futures depending on the underlying assumptions, or depending
on the parameter values used in the models. Due to the large number
of competing theoretical models with overlapping and ambiguous predictions,
we are reluctant to interpret our results as favoring any particular
model. Perhaps futures markets influence cash markets through multiple,
offsetting channels. Perhaps futures play a more-important stabilizing
role in markets that lack alternative stabilization mechanisms.
