Equity index futures contracts and share price volatility: A South African perspective

The purpose of this research is to determine whether the trading of equity index futures contracts on the South African Futures Exchange (SAFEX) results in an increase in the volatility of the underlying spot indices. Since equity index futures contracts were first listed in the USA in 1975, various studies have been undertaken to determine whether the volatility of shares in the underlying indices increases as a result of the trading of such futures contracts. These studies have lead to the development of two schools of thought: [a] Trading activity in equity index futures contracts leads to an increase in the volatility of index shares. [b] Trading activity in equity index futures contracts does not lead to an increase in the volatility of the index shares and could in fact lead to greater stability in equity markets. Although some evidence of higher volatility in expiration periods was found, volatility in the expiration periods was not consistently higher than in the corresponding pre‐expiration period.