The Impact of Futures Trading on Spot Price Volatility: Evidence from Turkey

Abstract: The main goal of this thesis is to investigate the effect of the introduction of futures trading on the nature of spot price volatility. Specifically, changes in volatility, speed of information flow, persistence of volatility shocks and asymmetric response are examined in Istanbul Stock Exchange (ISE) National-30 Index contracts for the period before and after the introduction of Turkish Derivatives Exchange (TurkDEX) in February, 2005. Changes in volatility, news transmission and persistence of volatility are tested using a GARCH (1,1) model, and changes in volatility and asymmetric response are tested using an E-GARCH (1,1) model. Statistically insignificant weak evidence of decrease in volatility is found using the both models. In addition, an increase in the speed of news transmission but no change in the persistence of volatility shocks or asymmetric response are found for the period examined.