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Individual Share Futures Contracts: The Economic Impact of Their Introduction on the Underlying Equity Market

Author

Listed:
  • Maurice Peat

    (Discipline of Finance, University of Sydney)

  • M. McCorry

Abstract

In May of 1994 (and on two subsequent dates), the Sydney Futures Exchange introduced futures contracts on slected issues of common stock. These new contracts, known as individual share futures (ISF's), represent a unique type of derivative product. This paper examines the impact of the introduction of ISF contracts on the trading behaviour of the underlying equity market. Using prior literature (related to the introduction of both options contracts and stock index futures contracts on various global markets), a number of hypotheses are developed from models of market behaviour. These hypotheses are tested empirically within the Australian context. In contrast to both option and stock index futures introduction, the introduction of ISF's results in a significant increase in both the underlying market trading volume and volatility, with no discernable returns effect.

Suggested Citation

  • Maurice Peat & M. McCorry, 1997. "Individual Share Futures Contracts: The Economic Impact of Their Introduction on the Underlying Equity Market," Working Paper Series 74, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:wpaper:74
    as

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    File URL: http://www.finance.uts.edu.au/research/wpapers/wp74.pdf
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    References listed on IDEAS

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    1. Grossman, Sanford J, 1988. "An Analysis of the Implications for Stock and Futures Price Volatility of Program Trading and Dynamic Hedging Strategies," The Journal of Business, University of Chicago Press, vol. 61(3), pages 275-298, July.
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    4. Merton, Robert C., 1980. "On estimating the expected return on the market : An exploratory investigation," Journal of Financial Economics, Elsevier, vol. 8(4), pages 323-361, December.
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