TEL  Vol.4 No.9 , December 2014
Analysis of the Effect of Index Futures on Stock Market with a New Fama-French 3-Factor Model
ABSTRACT
In this paper, the effect of Index Futures on stock market is studied. A new model, which is based on the 3-factor model in Fama and French (1993), the EGARCH-type volatility in Nelson (1991) and non-normal distribution of SSAEPD in Zhu and Zinde-Walsh (2009) is used. Fama-French 25 portfolios for US stock market (1951-2007) are analyzed. Following Pericli and Koutmos (1997), we divide data into 2 sub-samples: sample 1 (pre-SP500 Index Futures) and sample 2 (post-SP500 Index Futures). Our three main findings are as follows. Fama-French 3 factors are still alive in both samples. During the period of post-SP500 Index Futures, the coefficients in this new model become slightly lower and the volatility of stock market is bigger.

Cite this paper
Bei, X. , Yang, Y. , Li, L. and Mizrach, B. (2014) Analysis of the Effect of Index Futures on Stock Market with a New Fama-French 3-Factor Model. Theoretical Economics Letters, 4, 748-759. doi: 10.4236/tel.2014.49095.
References
[1]   Kang, S.H. and Yoon, S.-M. (2007) Index Futures Trading and Asymmetric Volatility: Evidence from Asian Stock Markets. The Journal of the Korean Economy, 8, 273-293.
http://www.econbiz.de/Record/index-futures-trading-and-asymmetric-volatility-evidence-from-asian-stock-markets-kang-sang-hoon/10009772044

[2]   Friedman, D., Harrison, G.W. and Salmon, J.W. (1983) The Informational Role of Futures Markets and Learning Behavior: Some Experimental Evidence. In: Streit, M.E., Ed., Futures Markets—Modelling, Managing and Monitoring Futures Trading, Basil Blackwell, Oxford.
http://www.econbiz.de/Record/the-informational-role-of-futures-markets-and-learning-behaviour-some-experimental-evidence-friedman-daniel/10003528165

[3]   Gulen, H. and Mayhew, S. (2000) Stock Index Futures Trading and Volatility in International Equity Markets. The Journal of Futures Markets, 20, 661-685.
http://dx.doi.org/10.1002/1096-9934(200008)20:7<661::AID-FUT3>3.0.CO;2-R

[4]   Bologna, P. and Cavallo, L. (2002) Does the Introduction of Stock Index Futures Effectively Reduce Stock Market Volatility? Is the “Futures Effect” Immediate? Evidence from the Italian Stock Exchange Using GARCH. Applied Financial Economics, 12, 183-192. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2023037 http://dx.doi.org/10.1080/09603100110088085

[5]   Santoni, G.J. (1987) Has Programmed mTrading Made Stock Price More Volatile. Federal Reserve Bank of St. Louise Review, 18-29. http://www.econbiz.de/Record/has-programmed-trading-made-stock-prices-more-volatile-santoni-gary-james/10001027292

[6]   Xie, S.Q. and Huang, J.J. (2014) The Impact of Index Futures on Spot Market Volatility in China. Emerging Markets Finance & Trade, 50, 167-177.
http://econ.pku.edu.cn/upload/file/20140318/20140318161780068006.pdf http://dx.doi.org/10.2753/REE1540-496X5001S111

[7]   Liu, F.G. and Wang, X.F. (2008) The Empricial Analyse on the Relationship of Index Future and Stock Market Volatility. Finance and Trade Research, 3, 86-94.
http://www.cnki.net/KCMS/detail/detail.aspx?QueryID=37&CurRec=4&dbcode=CJFQ&dbname=CJFD 2008&filename=CMYJ200803019&urlid=&yx=&uid=WEEvREcwSlJHSldTTGJhYkdRUjJaMEdqYTBuNWtIQ VUveEVxREd5ZFVUdndkMG13aHhrSDM1aldSeWdWeG8ycTM0VT0=$9A4hF_YAuvQ5obgVAqNKPCYcEj KensW4IQMovwHtwkF4VYPoHbKxJw!!&v=MjY5NjIxTHV4WVM3RGgxVDNxVHJXTTFGckNVUkw2ZVorUm 5GeW5nVUw3SkppRFNaTEc0SHRuTXJJOUViWVI4ZVg

[8]   Fama, E.F. and French, K.R. (1993) Common Risk Factors in the Returns on Stocks and Bonds. Journal of Nancial Economics, 33, 3-56. http://www.defaultrisk.com/pa_related_01.htm

[9]   Nelson, D.B. (1991) Conditional Heteroskedasticity in Asset Returns: A New Approach. Econometrica. Journal of the Econometric Society, 59, 347-370.
https://ideas.repec.org/a/ecm/emetrp/v59y1991i2p347-70.html
http://dx.doi.org/10.2307/2938260

[10]   Zhu, D. and Zinde-Walsh, V. (2009) Properties and Estimation of Asymmetric Exponential Power Distribution. Journal of Econometrics, 148, 86-99.
http://www.sciencedirect.com/science/article/pii/S0304407608001668 http://dx.doi.org/10.1016/j.jeconom.2008.09.038

[11]   Yang, Y. (2013) A New Fama-French 3-Factor Model with EGARCH-Type Volatilities and SSAEPD Errors. Working Paper, Finance Department, Economics School, Nankai University, Tianjin.

[12]   Rahman, S. (2001) The Introduction of Derivatives on the Dow Jones Industrial Average and Their Impact on the Volatility of Component Stocks. Journal of Futures Markets, 21, 633-653. http://www.researchgate.net/publication/229881535_The_Introduction_of_Derivatives_on_the_ Dow_Jones_Industrial_Average_and_Their_Impact_on_the_Volatility_of_Component_Stocks
http://dx.doi.org/10.1002/fut.1702


[13]   Lien, D. and Yang, L. (2008) Asymmetric Effect of Basis on Dynamic Futures Hedging: Empirical Evidence from Commodity Markets. Journal of Banking & Finance, 32, 187-198.
https://ideas.repec.org/a/eee/jbfina/v32y2008i2p187-198.html http://dx.doi.org/10.1016/j.jbankfin.2007.01.026

[14]   Hwang, S. and Satchell, S.E. (2000) Market Risk and the Concept of Fundamental Volatility: Measuring Volatility across Asset and Derivative Markets and Testing for the Impact of Derivatives Markets on Financial Markets. Journal of Banking & Finance, 24, 759-785.
https://ideas.repec.org/a/eee/jbfina/v24y2000i5p759-785.html

[15]   Pericli, A. and Koutmo, G. (1997) Index Futures and Options and Stock Market Volatility. Journal of Futures Markets, 17, 957-974.
http://dx.doi.org/10.1002/(SICI)1096-9934(199712)17:8<957::AID-FUT6>3.0.CO;2-K

[16]   Zhong, M.S., Darrat, A.F. and Otero, R. (2003) Price Discovery and Volatility Spillovers in Index Futures Markets: Some Evidence from Mexico. Journal of Banking & Finance, 28, 3037-3054. http://www.sciencedirect.com/science/article/pii/S0378426604000305

[17]   Rita, M.A. (2003) Maturity Effects in Futures Markets: Evidence from Eleven Financial Futures Markets. Working Paper, Santa Cruz Center for International Economics.
http://escholarship.org/uc/item/1n04g31b

[18]   Matanovic, E. and Wagner, H. (2012) Volatility Impact of Stock Index Futures Trading: A Revised Analysis. Journal of Applied Finance & Banking, 2, 113-126.
https://ideas.repec.org/p/pra/mprapa/51204.html

[19]   Alexakis, P. (2007) On the Effect of Index Futures Trading on Stock Market Volatility. International Research Journal of Finance and Economics, 11.
http://wenku.baidu.com/view/266fe3ef0975f46527d3e1fb.html

[20]   Basdas, ü. (2009) Lead-Lag Relationship between the Spot Index and Futures Price for the Turkish Derivatives Exchange. Working Paper. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1493147

[21]   Xie, H. and Li, J. (2010) Intraday Volatility Analysis on S&P 500 Stock Index Future. International Journal of Economics and Finance, 2. http://ccsenet.org/journal/index.php/ijef/article/view/5894

[22]   Carhart, M.M. (1997) On Persistence in Mutual Fund Performance. The Journal of Finance, 52, 57-82. http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1997.tb03808.x/abstract

[23]   Gharghori, P., Mudumba, S. and Veeraraghavan, M. (2007) How Smart Is Money? An Investigation into Investor Behaviour in the Australian Managed Fund Industry. Pacific-Basin Finance Journal, 15, 494-513. http://dx.doi.org/10.1016/j.pacfin.2006.10.002

[24]   He, Y. (2008) An Improvement of Fama French Three-Factor Model Based on State Switch Information. Chinese Journal of Management Science, 16, 7-15. (In Chinese)
http://www.zgglkx.com/CN/abstract/abstract12793.shtml

[25]   Wang, H. (2012) Aceruals Quality and Asset Pricing—Evidence from Chinese Stock Markets. Working Paper. http://www.cnki.net/KCMS/detail/detail.aspx?QueryID=63&CurRec=2&recid=&filename =1011233281.nh&dbname=CDFDLAST2012&dbcode=CDFD&pr=&urlid=&yx=&uid=WEEvREcwSlJHSld TTGJhYlN6MzFCNXBBK2NjdXdYMkpIQ1h6Mis0dUw3UW1XZmd6dHlqMHp2NnZ1aEc1Vmg2Q3RNZz0=$9 A4hF_YAuvQ5obgVAqNKPCYcEjKensW4IQMovwHtwkF4VYPoHbKxJw!!&v=MzI3NTdML0lWRjI2SDdHN 0hkUEVycEViUElSOGVYMUx1eFlTN0RoMVQzcVRyV00xRnJDVVJMNmVaK1JvRkN2blY

 
 
Top