The impact of futures trading on volatility of the underlying asset in the Turkish stock market

Abstract

This paper examines the impact of the introduction of stock index futures on the volatility of the Istanbul Stock Exchange (ISE), using asymmetric GARCH model, for the period July 2002–October 2007. The results from EGARCH model indicate that the introduction of futures trading reduced the conditional volatility of ISE-30 index. Results further indicate that there is a long-run relationship between spot and future prices. The results also suggest that the direction of both long- and short-run causality is from spot prices to future prices. These findings are consistent with those theories stating that futures markets enhance the efficiency of the corresponding spot markets.