New Insights into the Impact of the Introduction of Futures Trading on Stock Price Volatility

Abstract

In this paper we examine whether, and to what extent, the introduction of trading in share futures contracts on individual stocks (ISF) has impacted on the systematic risk and volatility of the underlying shares. The use of ISF allows a unique experimental design that complements existing work on index futures. Our major findings are as follows. First, we find a general reduction in systematic risk on individual stocks following the listing of futures. Second, we find evidence of a decline in unconditional volatility. Third, we find mixed evidence concerning the impact on conditional volatility. Fourth, the introduction of futures is 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 which are typical of existing studies.