Initiation of Futures Contracts and Volatility – Using Firm-Level Data in Pakistan

Abstract

This paper investigates the impact of futures contracts (FC) on volatility of stock prices using firm-level data of Pakistan-Stock-Exchange (PSX) from 1999 to 2015. GARCH model is used in this paper to examine initiation of FC on volatility. The results propose that after the initiation of FC, the stock price volatility of 17 companies stabilizes, whereas the stock price volatility of four companies destabilizes and for the seven companies it does not change. Hence, on average, the findings support the stabilization hypothesis which asserts that introduction of derivatives stabilizes the market. The finding supports the theories that derivative securities expand investors’ choices for investment. The results of the study encourage the investors to invest in derivatives and the regulators should encourage derivatives market as it stabilizes the volatility