Spill over effects of futures contracts initiation on the cash market: a regime shift approach

Spill over effects of futures contracts initiation on the cash market: a regime shift approach This paper investigates possible spillover effects on the spot market due to the initiation of derivatives markets. Although speculation, which is apparent because of the low transaction cost of derivatives markets, produces noise in the financial system, the speculative forces and the rational hedging strategies jointly contribute to the price discovery process. Furthermore, the demand and supply forces are responsible for the financial system equilibrium and high volatility regimes imply high rates for the accumulation of new information. According to many analysts, there still exists a puzzle regarding the stabilization or destabilization effect of Futures contracts’ onset, which is both country and model specific. For that reason, this paper examines empirically the case of three European countries by the application not only of conventional structural break analysis, but also of regime shift analysis in order to account for the timing of possible spillover effects, and hence, to overcome the conflicting results of the extant literature. Furthermore, the proposed econometric methodology considers some stylized financial facts such as the leverage effect, the time varying risk premium, the decomposition of the day of the week effect, the leptokurtosis and the skewness of the returns’ distributions. For the purposes of our analysis we use data from the UK, Spain and Greek capital markets and according to the empirical findings, there exists a significant stabilization effect, which is negatively associated with the level of efficiency and completeness of the capital markets examined. However, in some cases there exists a short run destabilization effect for 1 or 2 months. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Spill over effects of futures contracts initiation on the cash market: a regime shift approach

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Springer US
Copyright © 2009 by Springer Science+Business Media, LLC
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
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