The impact of futures trading on underlying stock index volatility: the case of the FTSE Mid 250 contract

Abstract

This paper investigates the effect of futures trading in the FTSE Mid 250 index on the underlying spot market using symmetric and asymmetric GARCH methods. Tests for the presence of asymmetries suggest a symmetric model adequately captures the response of volatility to news. Results indicate that following the onset of futures trading the quantity of information flowing into the market increased. However, the rate at which news is impounded into prices fell, with an associated rise in the persistence of information. These findings are consistent with the institutional characteristics and trading history of the FTSE Mid 250 market in the period following the onset of futures trading.