(The) effect of the introdution of stock index futures on stock market volatility and market efficiency

Abstract

This study examines stock market behavior related to the stock market volatility based on time-varying characteristic. The effect of the introduction of stock index futures on stock market volatility and market efficiency and the intertemporal relation between risk and expected returns are investigated. In chapter II, this study examines the effect of the start of trade in stock index futures on cash market volatility for the Australian, Japan, Hong Kong, U.S., and U.K. stock markets. As a means to control for all determinants of volatility other than the event of the stock index futures listing, we construct an international portfolio composed of individual stock market indices. This study examines whether changes in volatility occur after the stock index futures listing using the iternational portfolio. The result indicates that portfolio return volatility increases after the index futures listing. Chapter III documents the effect of the trade in the stock index futures on market efficiency. This study examines whether a structural change in the time-varying volatility of stock returns occurs after the stock index futures listing, using the Switchig GARCH (Generalized Autoregressive Conditional Heteroskedastic) model. Evidence shows that the autocorrelation of stock volatility decays more rapidly after than before the stock index futures listing and implies that stock index futures makes the stock market more efficient. In chapter IV, this study examines the effect of the trade in stock index futures on cash market volatility using macroeconomic volatility as control variables for the U.S., Japan, the U.K., and Hong Kong. Using a BVAR (Bayesian Vector Autoregressive) model with dummy variables, this study shows that there is no significant change in stock market volatility after stock index futures are introduced to each stock market. Also, evidence shows some relation between stock market volatility and macroeconomic volatility. In the U.K., evidence show...