STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING BANKING UNIVERSITY OF HO CHI MINH CITY ___________ LE CHI TRUNG THE IMPACT OF INDEX FUTURES TRADING ON UNDERLYING STOCK INDEX VOLATILITY: EMPIRICAL EVIDENCE FROM VIETNAM ON VN30 GRADUATION THESIS MAJOR: FINANCE – BANKING CODE: 7340201 HO CHI MINH CITY, 2018 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING BANKING UNIVERSITY OF HO CHI MINH CITY __________ LÊ CHÍ TRUNG THE IMPACT OF INDEX FUTURES TRADING ON UNDERLYING STOCK INDEX VOLATILITY: EMPIRICAL EVIDENCE FROM VIETNAM ON VN30 MAJOR: FINANCE – BANKING CODE: 7340201 SUPERVISOR: MsC. NGUYỄN MINH NHẬT HO CHI MINH CITY, MAY 2018 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT A completed study would not be done without any assistance. Therefore, the authors who conducted this research would like to express our deepest gratitude my supervisors Nguyen Minh Nhat for his supports, encouragement, invaluable academic advice. Since this is a relatively new field at the Banking University of Ho Chi Minh City in particular and of Vietnam in general, so this study required a lot of expertise and knowledge of social psychology in finance.
Finally, I would like to dedicate my concluding words to all friends and fellows of mine. Without their support, the work could not be done successfully. The author would like to undertake research projects with the topic name “The Impact of Futures Trading on Underlying Spot Market Volatility: Empirical Evidence from Vietnam on VN30”. The figures and references are cited from clear source and unity in the references.
The contents and results of this study have not been published in any public works until the present time. The author would like to be responsible for my commitment. Ho Chi Minh City, May 2018 Student in charge Le Chi Trung LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com i ABSTRACT The onset of derivatives in Viet Nam and futures trading in specific may cause the concerns in the participants in market. Over the world investors have started using derivatives to manage their risks and futures is one of the most effective one.
Since derivatives markets interact continuously with spot markets, the effect of derivatives markets on spot market volatility has become an important research topic. The present study tries to estimate the effect of introduction of futures index on the underlying stock volatility in Vietnamese stock market. To estimate the effect of introduction of derivatives on stock market, GARCH family models which are known for their ability to model volatility. Using these models, the asymmetric nature of stock returns and the volatility of stock returns on the introduction of derivatives are checked.
Most of the previous studies break the sample period into two sub- periods, one period before the introduction of futures trading and one after that introduction. In this paper, we are going to use the same approach. In order to capture the volatility, we apply at the same time the EGARCH (1,1), GARCH (1,1) models for the pre-futures period and the post-futures period as well. The results of this study indicate that the introduction of futures leads to a change in the spot market volatility of the VN30 index but not significant and there is also the existence of leverage effect and huge difference of ARCH and GARCH effect impact on spot price volatility in each sub-period LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ii ABBREVIATION WORDS MEANINGS GARCH Generalized Autoregressive Conditional Heteroskedasticity EGARCH Exponential Generalized Autoregressive Conditional Heteroskedasticity IGARCH Integrated Generalized Autoregressive Conditional Heteroskedasticity ARCH Autoregressive Conditional Heteroskedasticity OLS Ordinary Least Squares FTSE London Stock Exchange SSC State Securities Commission HNX Hanoi Stock Exchange BIST Borsa Instanbul Exchange HOSE Ho Chi Minh Stock Exchange NSE National Stock Exchange of India CSI Stocks traded in the Shanghai and Shenzhen stock exchanges HSCEI Hang Seng China Enterprises Index A50 Top 50 companies in the Shanghai Stock Exchange LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com iii LIST OF TABLE Table 2.
Some typical previous research with GARCH Family models. Descriptive and statistics of VN30 closing price in 10/2/2012 – 17/4/2018. VN30 Daily Closing Price Chart. VN30 Daily Logarithm Return Chart.
Descriptive and statistics of VN30’s return in 10/2/2012 – 17/4/2018. Heteroskedasticity Test: ARCH Effect at latency 1. Heteroskedasticity Test: ARCH Effect at latency 7. Standard GARCH (1,1) model with dummy variable.
Standard GARCH (1,1) model in two sub-period. Standard EGARCH (1,1) model with dummy variable. Standard EGARCH (1,1) model in two sub-period. 50 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com iv TABLE OF CONTENT ABSTRACT.
ii LIST OF TABLE. iii CHAPTER 1: INTRODUCTION. Necessity of the topic. Objectives and research questions.
Subject of the research. Scope of research. Significance of study .7 CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW. An overview of futures contract.
Futures contract definition. Development of futures trading over the world. Stock Index Futures Trading. Index futures trading definition.
The onset of futures trading in Vietnam. Stock index volatility. Stock index in Vietnam .16 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Spot price volatility.
Theoretical research basis. Review previous researches on impact of futures trading on spot market. Impact of futures trading on spot price volatility in emerging market countries. Impact of futures trading on spot price volatility in developed market countries.
General approaches in previous studies. Determination the impact of futures trading on spot price volatility. Determination how spot price volatility has been impacted in two sub-period. Gaps of previous studies .30 CHAPTER 3: DATA AND METHODOLOGY.
Generalized Autoregressive Conditional Heteroskedasticity (GRACH) model. Exponential GARCH model - EGARCH(1,1). Testing for ARCH effect .41 CHAPTER 4: RESULTS AND DISCUSSION OF RESULTS. Testing of ARCH effect on the set of data .45 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.
Empirical findings and results of estimation of GARCH model .1 Results on existence of the impact of futures trading introduction on spot price volatility – GARCH (1,1) with dummy variable. Results of GARCH estimation in two sub-period. Empirical findings and results of estimation of EGARCH model. Results on existence of the impact of futures trading introduction on spot price volatility – EGARCH (1,1) with dummy variable.
Results of EGARCH estimation in two sub-period. Comparing with other emerging market countries .52 CHAPTER 5: CONCLUSION AND POLICY IMPLICATIONS. Limitation and suggestion for further research.vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com vii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 1 CHAPTER 1: INTRODUCTION 1. Necessity of the topic There has been widespread interest in the effects of futures trading on prices in the underlying spot market.
It has often been claimed that the onset of derivative trading will destabilize the associated spot market and so lead to an increase in spot price volatility in some market. Considerable controversy exists over the influence of index futures trading on the underlying stock market volatility. Concern over the impact of futures enhanced following the stock market drop of October 1987 (Brady, 1988). Despite, there are abundant of studies having been undertaken, there continues to be little agreement on the effect that futures trading has on spot market volatility (see, for instance, (Aggarawal, 1988), (Baldauf & Santoni, 1991),and (Antoniou & Holmes, 1995).
Any increase in stock market volatility that has followed the onset of futures trading has generally been taken as justifying the traditional view that the introduction of futures markets enhance destabilizing speculation. The results from (Butterworth, 2000) reported for the Mid 250 index indicate that while the existence of futures trading has made little impact on the underlying level of volatility, as measured by the standard deviation, it has altered significantly the structure of spot market volatility. Specifically, while there is evidence of more information flowing into the spot market following the onset of trading, this new information is impounded into prices less rapidly than before the onset of trading, leading to an increase in the persistence of volatility. The debate on this topic has become more heated when there are also some findings proving that the introduction of futures has not caused impact on spot price volatility.
The results in (Antoniou & Holmes, 1995) suggest that futures trading has led to increased volatility, but that the nature of volatility has not changed post- LUAN VAN CHAT LUONG download : add luanvanchat@agmail. The finding of price changes being integrated pre-futures, but being stationary post-futures, implies that the introduction of futures has improved the speed and quality of information flowing to the spot market. Therefore, the significance of findings on existence of futures contract’s effect on volatility spot price is considered seriously in this research. Hence the evidence suggests that there has been an increase in spot price volatility on a daily basis, but that this is due to increased information in the market and not to speculators having adverse destabilizing effects.
Indeed, this increased volatility appears to be the result of futures trading expanding the routes over which information can be conveyed to the market. There are some approaches the impact of futures index on spot market volatility and GARCH model is usually utilized to detect the existence of futures contract effect. (Sathya, 2009) study has been documented, however, that time series returns for speculative markets show a clustering of fluctuations, i. larger changes tend to be followed by large changes, and small by small of either sign.
This appears to be the case for NSE Nifty. Such observations question the validity of linear regression models constructed under the assumption of homoscedasticity of the variance. It is for this reason that GARCH, which allows for time-varying variance in a process, is more appropriate to an analysis of volatility. With the introduction of futures trading in the emerging market as Vietnam, the estimation of the quality of the information flowing into the market and determine how fast it can impound into the stock market volatility.
More importantly, the impact of the onset of futures trading is considered cautiously in this research using some methodologies as previous studies. The initial findings in this field are concluded when futures has just traded for only 9 months are also the foundation and base for the further research and continue to review these result for the longer period and develop in more fruitful and practical way. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 3 Most of the previous studies done in the many financial markets (including developed and emerging countries, where generally, focused on the impact of the futures market on the spot market volatility. There were also some gaps and with specific assumption for each nation.
So, I want to conduct this research in the Vietnamese market and make it initial study in this field and also compare results with other countries categorized emerging, the specific objectives of this study are presented in the following section. Objectives and research questions We try to make our objectives clear in this study and put more attention into the main goals in order to have right direction to achieve the empirical findings with the most effective methodology. We also refer the previous studies on the way how they can set the ultimate goal in the same topic then the author apply and modify our target to be appropriate in this research. The objectives after the author consider cautiously will be presented in the following section 1.
Objectives Purpose 1: Determine the existence of impact of futures trading on the volatility of the underlying spot market.