We propose new tests to examine whether stock index futures affect stock market volatility. These tests decompose spot portfolio volatility into the cross-sectional dispersion and the average volatility of returns on the portfolio's constituent securities. Our tests show that for Nikkei stocks spot portfolio volatility increased and cross-sectional dispersion decreased compared with average volatility when Nikkei futures began trading on the Osaka Securities Exchange, but not on the Singapore International Monetary Exchange. For non-Nikkei stocks, no shift occurred when futures trading began on either exchange. These findings are consistent with the hypotheses that futures trading increases spot portfolio volatility but that there is no volatility “spillover” to stocks against which futures are not traded. However, the increase in volatility attributable to futures trading is small compared with volatility shifts induced by changes in broad economic factors.

Does futures trading increase stock market volatility? The case of the Nikkei stock index futures markets

This article used the Generalized Autoregressive Conditional Heteroscedasticity-Autoregressive Moving Average (GARCH-ARMA) and the exponentially Generalized Autoregressive Conditional Heteroscedasticity-Autoregressive Moving Average (EGARCH-ARMA) models to study the impact of the spillover and the leverage effects on returns and volatilities of stock index and Exchange Trade Fund (ETF) for developed and emerging markets. Previous unexpected returns for developed and emerging markets which have an opposite influence pattern on ETFs’ returns were identified. The spillover effects from returns are excellent for Hong Kong, followed by Singapore. Meanwhile, Taiwan's stock index return was recorded to have a strong negative impact on ETF return. Notably, this article shows that the spillover effects on stock index and ETF volatilities existed with bilateral influences. Despite a strong positive asymmetric volatility effect in Korea's ETF market, the leverage effect appears to play important roles in the explana...

An analysis of the spillover effects of exchange-traded funds

The Blackwell encyclopedic dictionary of finance

Owing to the growing importance of the Taiwan Top 50 Tracker Fund (TTT), the first and the only Taiwanese Exchange Traded Fund (ETF), this study investigates the change in the volatility of the component stocks of the Taiwan 50 Index after the introduction of TTT. Using the volatility measure proposed by Andersen et al. (2001) and the unconditional variance of a GARCH model to measure the volatilities of the constituents of the Taiwan 50 Index, the empirical results of this study demonstrate that the volatility of the component stocks increased following the establishment of TTT. The patterns of volatility change do not differ statistically among different size categories. However, the volatilities of the electronic and the financial sector TTT constituent companies increased significantly after the introduction of TTT, while the volatility of companies in the mixed sector reduced.

Volatility effect of ETFs on the constituents of the underlying Taiwan 50 Index

Exchange Traded Funds (ETFs), including the innovative leveraged (long and inverse) types, and the ever more creative traditional versions, are accelerating in popularity as preferred investment and trading vehicles. Real estate, a major investment sector, has been made more accessible through these tools. This study investigates if the introduction of real estate ETFs is impacting the volatility of their underlying real estate stocks. Tests conclude that the introduction of leveraged (long and inverse) and traditional real estate and real estate related ETFs, linked to the Dow Jones US Real Estate and Financial Indices and the leveraged (long and inverse) ETFs, benchmarked to the Russell 1000 Financial Services Index, significantly increased the volatility in their component real estate stock prices. The leveraged ETFs tied to the Dow Jones US Real Estate and Financial Indices caused the highest volatility, approximately tripling the volatility in the underlying real estate securities. Traditional ETFs w...

Have leveraged and traditional ETFs impacted the volatility of real estate stock prices

Stock volatility and program trading: theory and evidence

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Stock volatility and program trading: theory and evidence