Index Future Trading and Spot Market Volatility in Frontier Markets: Evidence from Ho Chi Minh Stock Exchange
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Index Future Trading and Spot Market Volatility in Frontier Markets: Evidence from Ho Chi Minh Stock Exchange Loc Dong Truong1 · Anh Thi Kim Nguyen2 · Dut Van Vo1 Accepted: 8 October 2020 © Springer Japan KK, part of Springer Nature 2020
Abstract This study investigates the impact of index futures trading on the spot market volatility for Ho Chi Minh Stock Exchange (HOSE). The data used in this study are daily VN30-Index, future trading volume and open interests covering the period from March 18th, 2015 to January 2nd, 2020. In order to capture the asymmetric effect, the EGARCH(1,1) model is employed in this study. It is found that the introduction of index future trading leads to the increase the spot market volatility. In addition, our empirical findings reveal that the impact of recent news on spot market volatility in the post-index future period is greater that than the pre-index future period; and the market volatility in the post-futures period is more persistent than in the pre-futures period. Moreover, the level of asymmetric effect on the market volatility in the post-index future period is significantly lower than that for the pre-index futures period. Finally, the results derived from the Granger causality test confirm that the bi-directional causality relation between the spot market volatility and the future trading activity exists in HOSE. Keywords Index future introduction · Spot market volatility · EGARCH · HOSE JEL Classification G10 · G13
* Loc Dong Truong [email protected] Anh Thi Kim Nguyen [email protected] Dut Van Vo [email protected] 1
College of Economics, Can Tho University, Can Tho, Vietnam
2
Faculty of Economics and Business Administration, An Giang University, Vietnam National University Ho Chi Minh City, Long Xuyen, Vietnam
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L. D. Truong et al.
1 Introduction The impact of derivatives trading on the spot market has attached a huge interest from both researchers and policy makers during the last decades. Most of studies in this field have focused on the impact of derivatives introduction on the underlying stocks volatility. However, the debate on the introduction of future trading on the spot market volatility has been still ongoing. Several studies stress that the introduction of future contracts destabilizes the spot market (Lee and Ohk 1992; Antoniou and Holmes 1995; Gulen and Mayhew 2000; Yu 2001; Bae et al. 2004; Pok and Poshakwale 2004). Some scholars have argued that the increase in spot market volatility following the introduction of future trading is due to high degree of leverage and the participation of uninformed speculative traders in the futures markets. However, other researchers argue that the introduction of index futures trading enables to provide more information to investors and to allow for the high speed of information flows to the underlying spot market. Thus, it makes the spot market stabilized. This argument is consistent with the conclusion of other several studies (i.e., Pericli and Koutmos 1997; McKenzie et al. 2001; Bologna
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