Futures trading and cash market volatility: Stock index and interest rate futures

Futures trading and cash market volatility: Stock index and interest rate futures here is a widespread belief today that uncertainty and financial risk are greater now than at any time since the turbulent 1920’s. Financial risk and uncertainty is commonly associated with more volatile financial asset prices: stock prices, interest rates, and exchange rates. Recently, day-to-day movements in these prices have seemed too large to be realistically attributed to any objective new information. Large moves in stock prices, for example, have occurred only to be reversed in the hours immediately following. These episodes have instilled in investors a growing uncertainty about the future and about the future value of asset prices. There is a clear perception that volatility and the risk of holding financial assets has increased. Several explanations have been offered to explain the perceived increase in volatility. One is speculation. Financial markets, it is argued, are presently subject to more speculative activity than in the past, and this activity is on net destabilizing. Fluctuations in asset prices are attributed not to changes in economic fundamentals (or to changes in expectations about them) but to large, professionally-managed, speculative trading programs.’ The “Triple Witching Hour” trading phenomenon in the stock market is singled out as a prime example. This belief http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

Futures trading and cash market volatility: Stock index and interest rate futures

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Abstract

here is a widespread belief today that uncertainty and financial risk are greater now than at any time since the turbulent 1920’s. Financial risk and uncertainty is commonly associated with more volatile financial asset prices: stock prices, interest rates, and exchange rates. Recently, day-to-day movements in these prices have seemed too large to be realistically attributed to any objective new information. Large moves in stock prices, for example, have occurred only to be reversed in the hours immediately following. These episodes have instilled in investors a growing uncertainty about the future and about the future value of asset prices. There is a clear perception that volatility and the risk of holding financial assets has increased. Several explanations have been offered to explain the perceived increase in volatility. One is speculation. Financial markets, it is argued, are presently subject to more speculative activity than in the past, and this activity is on net destabilizing. Fluctuations in asset prices are attributed not to changes in economic fundamentals (or to changes in expectations about them) but to large, professionally-managed, speculative trading programs.’ The “Triple Witching Hour” trading phenomenon in the stock market is singled out as a prime example. This belief

Journal

The Journal of Futures MarketsWiley

Published: Aug 1, 1988

References

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