2018•SSRN Electronic JournalOpen access

The Impact of Futures Market on Spot Price Volatility, and Market Efficiency: Evidence from Thai Stock Index Futures

Sitthidej Bamrungsap

Abstract

This research examines the impact of Thai securities futures on the underlying spot market. Specifically, the study investigates whether (1) Thai securities futures market reduces spot price volatility or stabilizes the underlying spot market, (2) the futures market helps facilitating the transmission of information to spot market, and enhancing market efficiency. The Generalized Autoregressive Conditional Heteroskedastic (GARCH) Model is employed, using three sets of daily SET50 stock index data, ranging from January 2000 to April 2018. The results reveal that Thai futures market does not induce spot price volatility, or destabilizes the underlying spot market. Due to the existence of futures market in Thailand, new information has been transmitted to the underlying spot market faster and the persistence of past information reduces, resulting in a reduction in spot price volatility. Thus, market efficiency is improved.

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Key concepts: Spot market, Futures contract, Volatility (finance), Financial economics, Forward market, Autoregressive conditional heteroskedasticity, Economics, Spot contract