Does index futures trading cause market fluctuations?. Issue 2 (21st May 2018)

• Record Type: Journal Article
• Authors: Dong, Shanshan; Feng, Yun
• Is Part Of: China finance review international. Volume 8:Issue 2(2018)
• Page Start: 173
• Page End: 198
• Publication Date: 2018-05-21
• Subjects: Index futures -- HAR-RV -- Heterogeneous speculation -- Market fluctuations; G23 -- G29; Finance -- China -- Periodicals; Investments, Foreign -- China -- Periodicals; China -- Economic policy -- Periodicals; 332.095105
• DOI: 10.1108/CFRI-06-2017-0070
• Languages: English
• ISSNs: 2044-1398

Abstract

Abstract : Purpose: The purpose of this paper is to study the effect of different parts (predictable and impact) of different types of speculative behavior (intraday speculation, medium-term speculation and long-term speculation) on future fluctuations in the underlying index. Design/methodology/approach: The authors input information about heterogeneous speculative behavior into the HAR-RV model to study the effect of different parts (predictable and impact) of different types of speculative behavior (intraday speculation, medium-term speculation and long-term speculation) on the future fluctuation of the underlying index. Findings: The authors find that the increase in intraday speculation will exacerbate spot market volatility; and the expected increase of long-term value speculation can reduce market volatility, but the shock of speculation will exacerbate market volatility. Practical implications: The authors suggest that regulators should strictly limit speculative intraday trading, and also focus on the long-term value speculation that decreases market volatility, in order to guide the benign development of the markets that stabilize abnormal market fluctuations. Originality/value: First, in view of the correlation between the futures and spot markets, the authors put forward a new proxy for the speculation degree. Second, the authors input heterogeneous speculative behavior into the HAR-RV model to study the effects of different parts (predictable and impact) on different types of speculative behavior (intraday speculation, medium-term speculation and long-term speculation) on the future fluctuation of the underlying index.