Index Future Trading, Spot Volatility And Market Efficiency

Research Article

This paper examines the impact of the listing of index futures trading on spot market volatility, market efficiency and volatility asymmetric responses. In order to model the effects of the introduction of index futures contracts, a modified GJR-GARCH model has been applied to examine the structural change of conditional variances before and after the introduction of index futures trading in S&P500, Nikkei 225, ASX all Ordinaries, and an equally weighted international portfolio. Additionally, this study adopts the coefficient dynamic tests to examine whether the identified impacts of index futures are consistent over time in both the individual indices and the international portfolio. In the post-futures period, we found that an increase in conditional volatility and market efficiency in Japan, and an increase in the equally weighted international portfolio. In the U.S. and Australia, however, no significant structural change on conditional variance is observed. The identified increase in volatility and market efficiency in the international portfolio are consistent over time.

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