The Impact of Index Futures on Market Efficiency and Volatility of Spot Index: An Empirical Evidence from Emerging Economies (BRICS)

Abstract

The concern of the impact of introduction of futures markets on the spot market has gained attention of researchers in both developing and developed countries. In this vein, this study investigates the impact of introduction of index futures on the stability aspect of underlying spot markets in BRICS economies. Specifically, this study checks the impact of introduction of index futures on the spot markets’ volatility and market efficiency by using the daily return data of spot index of emerging economies. The equal pre- and post-futures data is used for analysis. An AR (1) augmented GJRGARCH approach with underling error distribution of GED is used to estimate the level of market efficiency and volatility in the underlying spot market. The findings of the study suggest presence of volatility in the spot market post introduction of index futures. On the other hand, the study presents the significant increment in market efficiency of indexes of BRICS except Nifty index of India. These results suggest that the relationship does exists between market efficiency and volatility (according to the seminal work of Ross 1980 and others), which may imply that markets will have to bear cost (in terms of increase in volatility) for potential gains (increase in the level of market efficiency) if they introduce parallel futures markets.