An Empirical Study Of The Impact Of Taiwan Stock-index Futures On The Spot Market Fluctuation

Stock Index Futures is a standardized agreement, the buyers and sellers will carry onthe stock index transaction in accordance with the mutually pre-agreed price at aparticular time in the future.The introduction of the Stock Index Futures tend to have acertain effect on the spot market.The present paper examines the impact of futures trading on spot market volatility,particularly the effect of futures introduction on spot market volatility in Taiwan stockmarket by using daily return of Taiwan Stock Index from July02,1997to December31,2011excluding holidays when there were no transactions. The GARCH (1,1) model thatcaptures the heteroscedasticity in returns has been applied to study market volatility byusing Taiwan Stock Index return as independent variables. The results indicate that theintroduction of futures trading has had a tiny impact on market volatility. The results ofGARCH coefficients suffice the fact that past conditional information has a less impacton the volatility of market returns than recent news announcements. However, theimportance of recent news on spot market volatility has increased and the persistenceeffect of old news has declined with the introduction of futures trading. This implies thatafter the introduction of futures trading, the spot market has become more efficient owingto the diminishing importance of old news and faster incorporation of recent news inprices.The conclusion shows that the Taiwan Stock Index Futures are successful not onlyin contract design but also in regulatory control. In order to ensure the smooth running ofChina’s CSI300Stock Index Futures in the development process in the future, we needto learn from the successful experience of the Taiwan Index Futures, enhance riskawareness, increase the risk supervision and then ensure the smooth running of themarket.