Abstract:
The effects of the introduction of stock futures available in Pakistan have not been examined or analyzed. There is only one study that examines the relationship between stock futures and their impact on the volatility of spot market which is not enough to provide solid empirical evidence of stock futures effect on volatility. So this research aimed at examining the effects of stock futures on the volatility of spot price of 10 selected companies in Pakistan. EGARCH model was employed to examine futures trading effects on spot market volatility. The empirical analysis was conducted for the monthly closing prices returns of each stock of company for the period between from January 2005 till February 2010.some months of 2008 were excluded from the sample period because most companies did not trade in those months. Most of the data was retrieved from Karachi Stock Exchange official website. The analysis reveals mixed findings, most of the selected companies stocks reveal that the introduction of futures market reduced or decreased the volatility in spot market. This is followed by insignificant impact of futures market on spot volatility. Besides, some of the companies are having significant negative effect of information on volatility.
