Impact of single stock futures trading on stock market volatility
Date
2017
Authors
Karanja, Cindy Wangeci
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
This paper analyses the impact of trading single stock futures on stock market volatility. Specifically, it investigates the effect of trading single stock futures on individual stock return volatility. In addition, it aims to identify any presence of volatility feedback which is an asymmetric effect. This is based on an EGARCH model. The paper uses India stock market data on stocks from the information technology, banking, oil and gas and the consumer sectors. Eight stocks are chosen as result of ranking the stocks with single stock futures contracts based on market capitalization. First, the stocks are tested for ARCH effects which results into dropping the ITC stock. Individual EGARCH models are run followed by an extraction of the conditional volatility values. A regression is ran based on the stock returns against a dummy variable representing pre/post futures trading and the conditional volatility values. Subsequently, diagnostics tests are run for each of the EGARCH models. WIPRO displays the most conclusive results as a result of passing the model diagnostic test while the stock with the most inconclusive results was Tata Motors. Based on these results, it is evident that some of the stock returns volatility was affected by futures trading while for other stocks, there was an insignificant effect or no effect.
Description
A Research project Submitted in partial fulfillment of the requirements for the degree of Bachelor of Business Science in Financial Economics at Strathmore University
Keywords
Single stock futures, Stock markets, India stock market, EGARCH