Spot price volatility, information and futures trading: evidence from a thinly traded market

Abstract

The impact of futures trading on spot volatility is examined for a thinly traded contract, the FTSE Eurotrack. Futures trading increases the rate at which information is impounded into prices and reduces persistence. These benefits cease after the suspension of trading. The results suggest that even in a thinly traded market the existence of futures has a beneficial impact on price discovery in the underlying spot market. The paper highlights the need to determine not only whether spot price volatility changes after the introduction of futures trading, but also, if it does, why it does, before drawing policy conclusions about the regulation of futures markets. Failure to address the latter issue may lead to inappropriate policy conclusions.