The Effect of Contemporaneous Futures Market Volume on Spot Market Volatility

There has been considerable interest, both academic and regulatory, in the hypothesis that the higher is the volume in the future market, the greater is the destabilizing effect on the stock market. We show that conventional approaches, such as adding exogenous variables to GARCH models, may lead to false inferences in tests of this question. Using a Stochastic Volatility model, we show that, contrary to regulatory concern, contemporaneous futures market trading has no significant effect on spot market volatility, However, in contrast to previous studies, lagged futures volume is found to have a small positive effect on spot volatility. 

Download is not available