Volatility, expiration day effect and pricing efficiency: evidence from the Kuala Lumpur composite index futures
A study was conducted on issues related to the introduction and trading of Kuala Lumpur Composite Index futures contract in Malaysia. Issues related to volatility, expiration day effect and pricing efficiency were examined. The test (using Levene test) indicated that a decrease in volatility was...
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| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Penerbit Universiti Kebangsaan Malaysia
2002
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| Online Access: | http://journalarticle.ukm.my/2482/1/JP21-02.pdf http://journalarticle.ukm.my/2482/ http://www.ukm.my/penerbit/jurus.htm |
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| Summary: | A study was conducted on issues related to the introduction and trading of
Kuala Lumpur Composite Index futures contract in Malaysia. Issues related
to volatility, expiration day effect and pricing efficiency were examined. The
test (using Levene test) indicated that a decrease in volatility was observed
after the futures trading. Most stocks show a significant decrease in volatility
in the post-futures period than their non-KLCI components. These noted
changes were not uniform and were dependent upon individual stocks and
industry sectors. It might be due to the existence of futures market which led
to a stability effect by increasing information flow and market liquidity, as
well as by reducing market risk by providing hedging opportunities. It is
concluded that futures volatility is significantly higher, especially where
there are big price movements of the underlying assets. No evidence of any
expiration day effect was found. The test of mispricing shows frequent
underpricing than overpricing. If transaction costs is included, it shows very
little mispricing |
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