The impact of futures on underlying asset volatility in South Africa
Date
2016
Authors
Naidoo, David
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Abstract
Purpose of the report
The purpose of this research paper is to identify the impact futures have on the volatility of the underlying asset in South Africa. The study delves into the impact the introduction of the ALMI (mini ALSI) future has on the underlying FTSE/JSE Top 40 Index. The report then identifies the effect the future’s introduction has on the underlying spot market.
Methodology
The methodology used in this paper is the GARCH (Generalized Autoregressive Conditional Heteroskedasticity) method for measuring the change in volatility at a known point in time for financial time series data. Sourcing of data from Bloomberg, of closing end-of-day prices of the FTSE/JSE Top 40 Index, is collected to test the impact the introduction of the ALMI future has on the underlying index’s volatility.
Summary of results
The results from GARCH show no significant impact on volatility after the introduction of the future. This research paper identifies that futures trading has no effect on the underlying spot market volatility yet establishes change in the dynamics of the spot market. The report reveals the efficiency of both the spot and futures markets, when the listings of new futures present no arbitrage opportunities. The findings from this research highlight the dynamics of the South African futures market, the market participants and regulatory authorities.
Description
MBA
Keywords
Futures market -- South Africa. Stock index futures -- South Africa. Stocks -- South Africa -- Rate of return.