New insights into the impact of the introduction of futures trading on stock price volatility

Michael D. McKenzie, Timothy J. Brailsford, Robert W. Faff

Research output: Contribution to journalArticleResearchpeer-review

48 Citations (Scopus)

Abstract

We examine whether, and to what extent, the introduction of trading in share futures contracts on individual stocks (i.e., individual share futures, or ISFs) has impacted on the systematic risk and volatility of the underlying shares. The use of ISFs allows a unique experimental design that complements existing work on index futures. Our major findings are as follows. First, we found a general reduction in systematic risk on individual stocks after the listing of futures. Second, we found evidence of a decline in unconditional volatility. Third, we found mixed evidence concerning the impact on conditional volatility. Fourth, the introduction of futures was found to impact on the market dynamics, as reflected by a change in the asymmetric volatility response, although the direction of that change is stock-specific. In general, the results point to a number of features that are case-specific and provide new insights into the mixed results that are typical of existing studies.

Original languageEnglish
Pages (from-to)237-255
Number of pages19
JournalJournal of Futures Markets
Volume21
Issue number3
DOIs
Publication statusPublished - Mar 2001
Externally publishedYes

Fingerprint

Futures trading
Stock price volatility
Systematic risk
Asymmetric volatility
Conditional volatility
Futures contracts
Experimental design
Market dynamics

Cite this

McKenzie, Michael D. ; Brailsford, Timothy J. ; Faff, Robert W. / New insights into the impact of the introduction of futures trading on stock price volatility. In: Journal of Futures Markets. 2001 ; Vol. 21, No. 3. pp. 237-255.
@article{b2d8b7c943274b7ea4f9a1b8eaf374c5,
title = "New insights into the impact of the introduction of futures trading on stock price volatility",
abstract = "We examine whether, and to what extent, the introduction of trading in share futures contracts on individual stocks (i.e., individual share futures, or ISFs) has impacted on the systematic risk and volatility of the underlying shares. The use of ISFs allows a unique experimental design that complements existing work on index futures. Our major findings are as follows. First, we found a general reduction in systematic risk on individual stocks after the listing of futures. Second, we found evidence of a decline in unconditional volatility. Third, we found mixed evidence concerning the impact on conditional volatility. Fourth, the introduction of futures was found to impact on the market dynamics, as reflected by a change in the asymmetric volatility response, although the direction of that change is stock-specific. In general, the results point to a number of features that are case-specific and provide new insights into the mixed results that are typical of existing studies.",
author = "McKenzie, {Michael D.} and Brailsford, {Timothy J.} and Faff, {Robert W.}",
year = "2001",
month = "3",
doi = "10.1002/1096-9934(200103)21:3<237::AID-FUT3>3.0.CO;2-0",
language = "English",
volume = "21",
pages = "237--255",
journal = "Journal of Futures Markets",
issn = "0270-7314",
publisher = "Wiley-Academy",
number = "3",

}

New insights into the impact of the introduction of futures trading on stock price volatility. / McKenzie, Michael D.; Brailsford, Timothy J.; Faff, Robert W.

In: Journal of Futures Markets, Vol. 21, No. 3, 03.2001, p. 237-255.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

T1 - New insights into the impact of the introduction of futures trading on stock price volatility

AU - McKenzie, Michael D.

AU - Brailsford, Timothy J.

AU - Faff, Robert W.

PY - 2001/3

Y1 - 2001/3

N2 - We examine whether, and to what extent, the introduction of trading in share futures contracts on individual stocks (i.e., individual share futures, or ISFs) has impacted on the systematic risk and volatility of the underlying shares. The use of ISFs allows a unique experimental design that complements existing work on index futures. Our major findings are as follows. First, we found a general reduction in systematic risk on individual stocks after the listing of futures. Second, we found evidence of a decline in unconditional volatility. Third, we found mixed evidence concerning the impact on conditional volatility. Fourth, the introduction of futures was found to impact on the market dynamics, as reflected by a change in the asymmetric volatility response, although the direction of that change is stock-specific. In general, the results point to a number of features that are case-specific and provide new insights into the mixed results that are typical of existing studies.

AB - We examine whether, and to what extent, the introduction of trading in share futures contracts on individual stocks (i.e., individual share futures, or ISFs) has impacted on the systematic risk and volatility of the underlying shares. The use of ISFs allows a unique experimental design that complements existing work on index futures. Our major findings are as follows. First, we found a general reduction in systematic risk on individual stocks after the listing of futures. Second, we found evidence of a decline in unconditional volatility. Third, we found mixed evidence concerning the impact on conditional volatility. Fourth, the introduction of futures was found to impact on the market dynamics, as reflected by a change in the asymmetric volatility response, although the direction of that change is stock-specific. In general, the results point to a number of features that are case-specific and provide new insights into the mixed results that are typical of existing studies.

UR - http://www.scopus.com/inward/record.url?scp=0035589973&partnerID=8YFLogxK

U2 - 10.1002/1096-9934(200103)21:3<237::AID-FUT3>3.0.CO;2-0

DO - 10.1002/1096-9934(200103)21:3<237::AID-FUT3>3.0.CO;2-0

M3 - Article

VL - 21

SP - 237

EP - 255

JO - Journal of Futures Markets

JF - Journal of Futures Markets

SN - 0270-7314

IS - 3

ER -