This study examines impact of the introduction of single stock
futures contracts on the return volatility of the SSFs-listed underlying
stocks. The study documents a significant decrease in return volatility
for the SSFs-underlying stocks following the introduction of single
stock futures contracts on the Karachi Stock Exchange. The multivariate
analysis in which the spot trading volume, the futures trading volume
and open interest were partitioned into news and informationless
components, the estimated coefficient of expected futures volume
component is statistically significant and negatively related to
volatility, suggesting that equity volatility is mitigated when the
expected level of futures activity is high. The findings of the
decreased spot price volatility of the SSFs-underlying stocks associated
with large expected futures activity is important to the debate of
regarding the role of equity derivatives trading in stock market
volatility. These empirical results for the Pakistan’s equity market
support theories implying that equity derivates trading improves
liquidity provision and depth in the equity markets, and appear to be in
contrast to the theories implying that equity derivates markets provide
a medium for destabilising speculation. Finally, the SSFs-listed stocks
were grouped with a sample of non-SSFs stocks to examine cross-sectional
data for comparing changes in return volatility. After controlling for
the effects of a number of determinants of volatility, sufficient
evidence is found to support that, this multivariate test, like the
previous analysis, provides no evidence that the volatility of the
SSFsunderlying stocks is positively related to the introduction of the
single stock futures trading in the Pakistan’s stock market.
The price and volume effect of initial single stock futures trading