Issues In Stock Index Futures Introduction And Trading. Evidence From The Malaysian Index Futures Market.

Bacha, Obiyathulla I. and Abdul, Jalil O. and Othman, Khairudin (1999): Issues In Stock Index Futures Introduction And Trading. Evidence From The Malaysian Index Futures Market. Published in: Capital Markets Review , Vol. 7, No. 1-2 (1999): pp. 1-46.

Abstract

This paper examines several issues related to the introduction and trading of stock index futures contracts in Malaysia. Issues related to volatility, pricing efficiency, systematic patterns and lead-lag relationships are examined. These issues were studied by way of addressing six research questions. We use two data sets. First, daily price data for 4 years and 2 years respectively for stock and futures markets and second, intraday, 15 minute interval data for 43 days (2 months) of futures trading.

Based on our results, we find no evidence of any increase in the volatility of the underlying market following futures introduction. If anything, the one year period following futures introduction had lower volatility. Intermarket comparison showed futures volatility to be higher. No evidence of any expiration day effect was found. We find frequent mispricing, with most of it being underpricing. Including transaction costs showed very little mispricing. Analysis of the 15 minute intraday data showed clear evidence of an overall U-shape in futures volume and volatility. However, a minor third peak at reopening following lunch break was also evident. We find no evidence of a lead-lag relationship, rather a contemporaneous one. Both markets appear to react simultaneously to information arrival.

• Item Type: MPRA Paper
• Language: English
• Keywords: Impact of the introduction of Stock Index Futures Contracts on the underlying equity market
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G19 - Other

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