Impacts of derivative markets on spot market volatility and their persistence

Fong, L.; Han, C.

doi:10.1080/00036846.2015.1005813

Impacts of derivative markets on spot market volatility and their persistence

Fong, L.; Han, C.

Authors

L. Fong

C. Han

Abstract

In this article, we investigate the impacts of futures and options markets on the volatility of the underlying market. Unlike earlier studies, the focus is on their persistence over time. Tests on the Hang Seng index yield several interesting results that often contrast with previous findings. Empirical results suggest that the quality of new information generated by derivative trading determines the impacts on the spot market volatility. The futures market provides new, material information reducing spot market volatility. The Options market, on the other hand, generates noisy information and distorts price, which is followed by an increase in volatility and a decrease in its sensitivity to price change. While the impact of futures persists, that of options mostly disappears as the market matures. Our conjecture is that the futures market is mainly driven by informed, experienced participants, while the options market attracts new, inexperienced investors.

Citation

Fong, L., & Han, C. (2015). Impacts of derivative markets on spot market volatility and their persistence. Applied Economics, 47(22), 2250-2258. https://doi.org/10.1080/00036846.2015.1005813

Journal Article Type	Article
Publication Date	Feb 3, 2015
Deposit Date	Jan 12, 2015
Publicly Available Date	Aug 3, 2016
Journal	Applied Economics
Print ISSN	0003-6846
Electronic ISSN	1466-4283
Publisher	Taylor and Francis Group
Peer Reviewed	Peer Reviewed
Volume	47
Issue	22
Pages	2250-2258
DOI	https://doi.org/10.1080/00036846.2015.1005813
Keywords	Futures, Options, Volatility, GARCH, G1, G14, G15.
Public URL	https://durham-repository.worktribe.com/output/1438928
Related Public URLs	http://dx.doi.org/10.2139/ssrn.2427478

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Copyright Statement
This is an Accepted Manuscript of an article published by Taylor & Francis Group in Applied Economics on 03/02/2015, available online at: http://www.tandfonline.com/10.1080/00036846.2015.1005813.