Author(s)

H. Baklaci & H. Tutek

Abstract

The derivatives market in Turkey has been in operation since February 2005. This paper examines the impact of future trading on spot volatility by using Istanbul Stock Exchange 30 (ISE 30) Index future contracts which represent the most frequently traded future contracts in Turkish derivatives market. The main objective of this paper is to investigate whether the existence of future markets in Turkey has improved the rate at which new information is impounded into spot prices and have any persistence effect. The results gathered from the study indicate that even though it has been in operation for a short period of time, the futures market in Turkey has significantly increased the rate at which new information is transmitted into spot prices and that it has reduced the persistence of information and volatility in underlying spot market resulting in improved efficiency. The results of this study have also some important implications for policy makers discussed in the final section of this paper. Keywords: derivatives market, volatility, spot market, GARCH. 1 Introduction There has been an ongoing debate on the impact of derivative markets on spot markets in terms of volatility, information flow, destabilizing spot markets and their speculative effects. Majority of the studies exploring the above impacts have been conducted on the developed markets, and particularly on U.S. (see for example, Board et al. [2]; Edwards [12]). On the other hand, there are only a few researches on emerging markets such as South Korea, India and Taiwan. (see for example Ryoo and Smith [18]; and Nath [16]).

Keywords

derivatives market, volatility, spot market, GARCH.