The temporal relationship between derivatives trading and spot market volatility in the U.K.: Empirical analysis and Monte Carlo evidence
✍ Scribed by Kyriacou, Kyriacos; Sarno, Lucio
- Publisher
- John Wiley and Sons
- Year
- 1999
- Tongue
- English
- Weight
- 369 KB
- Volume
- 19
- Category
- Article
- ISSN
- 0270-7314
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✦ Synopsis
This article examines empirically the dynamic relationship between spot market volatility, futures trading, and options trading in the context of a trivariate simultaneous equations model. The empirical analysis provides strong evidence that significant simultaneity, in addition to feedback, characterizes the relationship between the proxy for time-varying spot market volatility and derivative trading. Also, futures trading and options trading are found to affect spot market volatility in opposite directions in the structural model proposed. The Acknowledgments: The authors are indebted to Robert Webb (Editor) and two anonymous referees for constructive comments on a previous version of this article. This article was partially written while Lucio Sarno was a Visiting Scholar at the