The impact of single stock futures on the South African equity market

Abstract

The introduction of single stock futures to a market presents the opportunity to assess an individual company's response to futures trading directly, in contrast to the market-wide impact obtained from index futures studies. Thirty-eight South African companies were evaluated in terms of a possible price, volume, and volatility effect due to the initial trading of their respective single stock futures contracts. An event study revealed that SSF trading had little impact on the underlying share prices. A normalised volume comparison pre to post SSF trading showed a general increase in spot market trading volumes. The volatility effect was the main focus of this study with a GARCH(1,1) model establishing a volatility structure (pattern of behaviour) per company. Results showed a reduction in the level and changes in the structure of spot market volatility. In addition, a dummy variable regression could find no evidence of an altered company-market relationship (systematic risk) post futures.