Impact of Single Stock Futures on the Volatility of Underlying Russian Stocks

Transcription

1 Universiy of S. Thomas, Minnesoa UST Research Online Finance Faculy Publicaions Finance Impac of Single Sock Fuures on he Volailiy of Underlying Russian Socks Thadavillil Jihendranahan Universiy of S. Thomas, Minnesoa, David O. Vang Follow his and addiional works a: hp://ir.shomas.edu/ocbfincpub Par of he Finance and Financial Managemen Commons Recommended Ciaion Jihendranahan, Thadavillil and Vang, David O., "Impac of Single Sock Fuures on he Volailiy of Underlying Russian Socks" (2010). Finance Faculy Publicaions. 8. hp://ir.shomas.edu/ocbfincpub/8 This Aricle is brough o you for free and open access by he Finance a UST Research Online. I has been acceped for inclusion in Finance Faculy Publicaions by an auhorized adminisraor of UST Research Online. For more informaion, please conac libroadmin@shomas.edu.

2 Impac of Single Sock Fuures on he Volailiy of Underlying Russian Socks Thadavillil Jihendranahan and David O. Vang This paper looks ino he effec of Single Sock Fuures (SSF) inroducion on he rading volume and volailiy of underlying socks in wo differen Russian markes. The resuls indicae ha here is very lile evidence of rading volume shif from he spo marke o he fuures markes. Using a GARCH(1,1) model he underlying sock volailiy for 5 differen socks are esimaed and hese resuls indicae ha here is a reducion in volailiy afer he inroducion of SSF in he majoriy of he socks. Granger causaliy ess do no indicae ha he fuures rading causes significan changes in sock volailiy. I. Inroducion The cenral quesion sudied in his paper is he role of derivaive securiies in reducing sock marke volailiy in emerging markes. In recen years several emerging markes have inroduced equiy index based derivaive securiies and here are several sudies ha look ino he impac of such derivaives on he volailiies of he underlying socks 1. One of he main drawbacks of hese sudies is ha he underlying asse of index fuures is a baske of individual socks and hence i is difficul o inerpre he resuls of hese sudies a an individual sock level. Insead of index fuures his sudy uses he Single Sock Fuures (SSF), where he underlying asse is a single sock, o sudy he impac of hese conracs on he underlying asse volailiy. General percepion abou he equiy derivaes as expressed by Frazscher (2006) is ha equiy derivaives have usually reduced volailiy and srenghened liquidiy in equiy markes, enhanced reurns o insiuional invesors such as muual or pension funds, and reduced he cos of equiy lisings for firms. The couner argumen agains fuures markes is ha i can also arac speculaors. Since he underlying asse marke and he fuures marke prices are linked by arbirage, excessive speculaion in he derivaive marke can lead o desabilizaion of he underlying asse marke. Mos of he heoreical and empirical models use he underlying asse volailiy o measure he effec of fuures marke. An increase in volailiy of he underlying asse afer he inroducion of fuures marke can be consrued as is desabilizing effec. The heoreical explanaions on he effec of inroducion of derivaives on underlying asse volailiy can be found in Harris (1989). He argues ha derivaive markes will arac well-informed speculaors and will reduce he volailiy due o order imbalances caused by uninformed raders. Subrahmanyam (1991) has an informaion based model in which boh informed and uninformed invesors submi orders o a compeiive marke maker. Marke paricipans in his model can rade individual socks as well as *Thadavillil Jihendranahan is a Professor of Finance a Opus College of Business, Universiy of S. Thomas, S. Paul, Minnesoa, USA. David O. Vang is a Professor of Finance a Opus College of Business, Universiy of S. Thomas, S. Paul, Minnesoa, USA. 1 See Kan (1997), Ryoo and Smih (2004), Zhong, Darra and Oero (2004), Bae, Kwon and Park (2004), Pok and Poshakwale (2004), Drimbeas, Sariannidis, and Porfiris (2007), Kasman and Kasman (2008), Wang, Li, and Cheng (2009), among ohers. Global Business and Finance Review Fall 2010 Pages

3 Jihendranahan & Vang Impac of Single Sock Fuures on he Volailiy of Underlying Russian Socks 157 baskes of socks. Assuming ha mos of he informaion based rading will be on firm specific informaion, i will be o he advanage of uninformed raders o rade in he fuures marke han in he cash marke. The resul of his shif will be ha he cash marke will have a higher proporion of informed raders and lower liquidiy, bu his will no affec he volailiy of he underlying asses. Sein (1987) uses a model wih hedgers and speculaors o show he desabilizing effecs of fuures markes. According o his model, he opening of fuures markes will lead o increased speculaion and his will lead o price desabilizaion and decreased welfare. Inroducion of a derivaive conrac can reduce he volailiy of he underlying asse by increasing he speed a which new informaion is incorporaed ino he underlying asse price. Shor-sale is one of he mechanisms by which negaive informaion abou a sock will be incorporaed ino he prices. Shorsales allow hose invesors who do no own he sock o incorporae heir lower valuaions ino he equilibrium price of he asse (Miller, 1997). The volailiy-reducing effec of SSF should also be greaes in markes where shor-sales are resriced. As poined ou by Bris, Goezmann and Zhu (2007) mos of he emerging markes, including Russia, have banned or severely resriced shor-sales. Wih he inroducion of fuures conracs, informed raders can use hese conracs insead of shor selling o incorporae negaive informaion ino pricing and hereby improving he informaional efficiency of he marke. Single sock fuures are raded in several exchanges, bu he volume of rade of hese insrumens is relaively low in mos of he major markes, excep for emerging markes like Russia and India where hese conracs have araced considerable invesor ineres. The only empirical paper ha sudied he SSF effecs on sock volailiy is by Dennis and Sim (1999) using he SSF raded a he Sydney Sock Exchange. Our sudy is he firs of is kind ha looks ino he impac of single sock fuures on underlying sock volailiy in an emerging marke. Among he emerging markes Russia is an ap candidae for his sudy. Since he breakup of he Sovie Union a marke based economy has evolved in Russia along wih publicly held join sock companies and secondary sock markes. From is incepion in he mid 1990s, Russian markes are open o foreign invesors and his has conribued o he developmen of wo separae sock exchanges one caering predominanly o he foreign invesors and he oher for he domesic invesors. Russian Trading Sysem (RTS) was esablished in 1995 o ac as a secondary marke for he Russian equiies, and is modeled afer he NASDAQ marke in he Unied Saes and he rading is done elecronically. RTS primarily caers o he foreign invesors and prices are quoed in U.S. dollars. Moscow Iner-bank Currency Exchange (MICEX) sared rading sock in he lae 1990s and has affiliaed exchanges in several ciies around he counry. The quoes in his marke are in Russian rubles and i is dominaed by he domesic invesors. The SSF are raded in he Fuures and Opions on RTS (FORTS) marke, which is par of he RTS marke. There are significan differences beween he paricipans of hese wo exchanges. In he RTS marke he minimum rading is in los of USD5,000 which essenially resrics his marke o large raders. On he oher hand, MICEX has no resricions on he minimum rading size and has a sizable number of reail invesors. MICEX has over 20,000 ransacions per day, while RTS has fewer han 500. Since here is sufficien disincion beween he wo exchanges in erms of clienele and quoed currency, his sudy will observe he effec of SSF inroducion on he underlying sock volailiy in boh sock exchanges. The res of he paper is organized as follows. Secion II describes he empirical mehodology, Secion III deails he daa, Secion IV analyzes he resuls and Secion V concludes his paper.

4 158 Global Business and Finance Review Fall 2010 II. Empirical Mehodology Inroducion of SSF can have an effec on he rading volume of he underlying sock by shifing some of he rading aciviy away from he spo marke. This shif may also be an indicaion of high level of speculaive aciviy in he fuures marke, where he cos of ransacion is lower compared o he spo marke. The effec of inroducion of SSF on he rading volume of he underlying sock is esed using he following regression equaion: v i α 1 + β1+ β D+ ε (1) = 2 where v i is he log of rading volume in he RTS or MICEX markes, is he ime rend and D is a dummy variable wih a value of 0 when here is no fuures conrac and 1 for hose days when here is fuures rading. Since mos markes exhibi a growh in rading volume over ime, he rend dummy will capure his growh rend. A sudy by Chae (2005) shows ha he disribuion of daily volume is non-normal, wih high skewness and kurosis and hence, ordinary leas squared mehod canno be used on he level of rading volume. To alleviae his problem in his sudy we use a log funcion of he volume as suggesed by Ajinkya and Jain (1989). In his paper we measure he impac of he fuures markes on he underlying asse volailiy using he GARCH framework. Following Anoniou and Holmes (1995), he condiional mean and condiional volailiy of each of he socks in his sudy are esimaed using he following GARCH(1,1) model: R i = a0 + a1r M + ε (2) h 2 α 0 + α1ε 1 + β1h 1+ γd (3) = where R i is he reurn of he i h sock, R M is he reurn of he marke, h is he volailiy and D is a dummy variable ha has a value of 0 for he pre-fuures period and 1 for he pos-fuures period. For each of he socks in his sudy he sample consiss of daily reurns for wo years prior o wo years afer he inroducions of SSF. If he coefficien of he dummy variable is significan, hen i can be assumed ha he inroducion of he fuures conrac has a significan effec on he volailiy of he underlying asse. The uncondiional variance of he sock reurn can be calculaed as α 0 /( 1 α1 β1). An increase in he uncondiional variance would sugges ha greaer informaion is ransmied o he marke as a resul of he fuures rading. To es his hypohesis he sample is divided ino a 2 year ime period wihou any fuures rading and a 2 year ime period wih fuures rading o es if here is any difference in he uncondiional variance beween he wo periods. This sudy furher ess wheher here is a lead-lag relaionship beween he fuures rading and underlying asse volailiy 2. Following Pok and Poshakwale (2004), he following bivariae vecor auoregressive sysem is employed: 2 Lamoureux and Lasrapes (1991) suggesed using volume in he variance equaion of he GARCH model and heir resuls indicaed ha he GARCH effec disappears when volume is inroduced ino he variance equaion. As poined ou by Board, Sandmann and Sucliffe (2001), inroducion of volume ino he variance equaion can creae simulaneiy bias. Their argumen is ha volume and volailiy are joinly deermined by informaion arrivals and hence i is incorrec o assume ha

5 Jihendranahan & Vang Impac of Single Sock Fuures on he Volailiy of Underlying Russian Socks 159 h V α + ε k k j = 1, + τ jhi j + β j j= 1 j= 1 OI j (4) V OI = a V n n j 1 + π j + b jh j + µ j= 1 OI j j= 1 (5) where τ j and π j are coefficiens of he lagged regressors of he dependen variables, V is he fuures rading volume, and OI is he open ineres of he fuures conracs a ime. The null hypohesis is H 0 : β 1 = β 2 = = β k = 0, and if he null hypohesis is rejeced, hen fuures rading aciviy causes he underlying sock marke volailiy. III. Daa This sudy covers five SSF ha are raded in he RTS marke and heir underlying socks ha are raded in boh RTS and MICEX markes. The effecs of he inroducion of he SSF on he underlying sock volailiy is sudied by comparing he volailiy of he sock wo years prior o and wo years afer he inroducion of he SSF. The wo year period is chosen as o allow he effecs of he inroducion of he fuures conracs o be fully incorporaed in he underlying sock volailiy. This resuled in a sample of 5 socks 3 covering a period from 2001 o The deails of hese SSF are given in Table 1. The daily price and volume of he SSF and underlying socks are obained from RTS and MICEX. Table 1. Deails of Single Sock Fuures Conracs Name of he firm Ticker symbol of underlying sock Dae of SSF inroducion Conrac monhs Lukoil LKOH 9/19/2001 March, June, Sepember, December Roselecom RTKM 4/01/2002 March, June, Sepember, December Surgunefegas SNGS 9/19/2001 March, June, Sepember, December Norilsk Nickel GMKN 9/22/2004 March, June, Sepember, December Sberbank SBER 10/10/2005 March, June, Sepember, December Conrac size 10 shares 100 shares 1,000 shares 10 shares 100 shares Minimum iniial margin 12% 12% 12% 12% 12% volume is exogenous. To avoid his problem we are using he bivariae vecor auoregressive sysem o es he effecs of fuures volume on he volailiy of he underlying sock. 3 Gazprom SSF was also inroduced in 2001, bu since here was no enough daa on he underlying sock is available (prior o he inroducion of SSF) i was no included in he sudy. Anoher SSF ha is no included in his sudy is he SSF of Unied Energy Sysems which was broken ino several separae firms in 2008.

6 160 Global Business and Finance Review Fall 2010 IV. Resuls The effec of he SSF on he rading volume of he underlying sock of all five individual firms is given in Table 2. The coefficien of he ime rend is negaive and saisically significan for four ou of five socks lised in RTS, indicaing ha he rading volume in general, is decreasing in ha marke. On he oher hand, he ime-rend is posiive and saisically significan for four ou of he five socks lised in he MICEX. Par of he explanaion for he declining rading volume in RTS can be explained by he declining ineres of foreign invesors in he Russian sock marke. Russian domesic invesors on he conrary are much more acive in he equiy markes and his is refleced in he increase in MICEX rading volumes. The coefficiens of he dummy variable for he inroducion of fuures conrac do no indicae any significan reducion in rading volume of he underlying socks, excep in he case of Roselecom in he RTS marke. Conrolling for he ime rend, he inroducion of fuures rading has resuled in a saisically significan increase in he rading volume on MICEX of Lukoil, Norilsk Nickel and Sberbank. This increase in rading volume of underlying sock may be due o he use of sophisicaed hedging and arbirage sraegies used by he invesors in he MICEX marke. Overall he resuls of his Table 2. Effec of Fuures Inroducion on Underlying Sock Trading Volume Dependen Variable α 1 β 1 β 2 Adj. R 2 (Q-sa) Lukoil RTS-volume MICEX-volume ( ) * ( ) * (5.0269) * (7.4709) * (1.9781) ** (2.0886) ** ( ) * ( ) * Roselecom RTS-volume MICEX-volume Surgunefegas RTS-volume MICEX-volume Norilsk Nickel RTS-volume MICEX-volume Sberbank RTS-volume MICEX-volume ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * (0.2733) (9.4091) * (3.8837) * ( ) * (0.3920) (8.9393) * (2.4233) ** (0.6880) (2.3617) ** (1.0452) (0.2690) (0.7673) (1.5529) (3.2097) * (0.1614) (3.3708) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * * ** ***

7 Jihendranahan & Vang Impac of Single Sock Fuures on he Volailiy of Underlying Russian Socks 161 Panel A: RTS marke Table 3. Summary Saisics of Sock Reurns Firm Period Mean Sd. Dev. Skewness Kurosis Jarque-Bera Lukoil Roselecom Surgunefgas Norilsk Nickel Sberbank Panel B: MICEX marke Lukoil Roselecom Surgunefgas Norilsk Nickel Sberbank 9/20/99-9/19/03 9/20/99-9/18/01 9/19/01-9/19/03 4/3/00-4/1/04 4/3/00-3/29/02 4/1/02-4/1/04 9/20/99-9/19/03 9/20/99-9/18/01 9/19/01-9/19/03 9/23/02-9/22/06 9/23/02-9/21/04 9/22/04-9/22/06 10/10/03-10/10/07 10/10/03-10/7/05 10/10/05-10/10/ Firm Period Mean Sd. Dev. Skewness 9/20/99-9/19/03 9/20/99-9/18/01 9/19/01-9/19/03 4/3/00-4/1/04 4/3/00-3/29/02 4/1/02-4/1/04 9/20/99-9/19/03 9/20/99-9/18/01 9/19/01-9/19/03 9/23/02-9/22/06 9/23/02-9/21/04 9/22/04-9/22/06 10/10/03-10/10/07 10/10/03-10/7/05 10/10/05-10/10/ Kurosis (Excess) Jarque-Bera regression do no suppor he hypohesis ha he inroducion of fuures conrac shifs he rading away from he underlying sock marke. Summary saisics of sock reurns before and afer he inroducion of he fuures conracs is given in Table 3. A comparison of he sandard deviaions of he sock reurns before and afer he inroducion

8 162 Global Business and Finance Review Fall 2010 of he SSF will indicae wheher he inroducion has an effec on he volailiy. In he RTS marke pos SSF volailiies are lower for Lukoil, Roselecom and Surgunefegas. For Norilsk Nickel and Sberbank he volailiy is higher afer he inroducion of he SSF. In he case of he MICEX marke only Sberbank sock has a slighly higher volailiy afer he inroducion of he SSF. This preliminary analysis ses up he more deailed analysis of volailiy using he GARCH model. The effecs of inroducion of fuures conracs on he underlying sock volailiies using he GARCH model are given in Table 4. In he RTS marke he inroducion of SSF has a saisically significan negaive effec on he volailiies of Roselecom and Norilsk Nickel. For he oher hree socks he effec is saisically insignifican. Similar resuls are observed in he MICEX marke also. These resuls again confirm ha he inroducion of SSF did no increase he volailiy of he underlying sock and a leas in wo insances has reduced he volailiy. Given ha almos all socks, wih a few excepions, experienced a reducion in sandard deviaions pos fuures, i seems unlikely ha he inroducion of SSF is somehow responsible for he unique siuaion of Sberbank having a higher sandard deviaion in boh he RTS and he MICEX markes, pos fuures. A possible reason for his paricular excepion could be due o he fac ha Sberbank is a financial insiuion and ha he pos fuures ime period used in his sudy immediaely precedes a major Table 4. Effec of Fuures Conac on Sock Volailiy Panel A: RTS marke Firm a 0 a 1 α 0 Lukoil (1.8354) *** ( ) * Roselecom (1.8213) *** ( ) * Surgunefgas (1.5242) ( ) * α 1 β 1 γ (1.9370) *** (2.6104) * (4.0975) * (1.3667) (2.1743) ** (2.6237) * ( ) * (1.8447) *** (3.0933) * (4.7363) * (9.3287) * (0.6012) ( ) * (2.1845) ** (2.7587) * (5.7846) * (1.7991) *** Norilsk Nickel (0.0430) Sberbank (2.6492) * ( ) * (2.4834) * (2.9244) * (3.6115) * (0.2125) Panel B: MICEX marke Firm a 0 a 1 α 0 α 1 β 1 γ Lukoil (1.0858) ( ) * (3.4374) * (4.8135) * (8.4442) * (2.9298) * Roselecom (0.4012) ( ) * (2.0838) * (3.1365) * (6.7566) * (1.5087) Surgunefgas (0.4766) ( ) * (2.3770) * (4.6986) * (3.5645) * (2.1845) ** Norilsk Nickel (0.2008) ( ) * (3.1287) * (3.8444) * (6.0272) * (1.5658) Sberbank (4.0993) * ( ) * (2.2911) ** (3.4403) * (9.5850) * (0.7519) * ** ***

9 Jihendranahan & Vang Impac of Single Sock Fuures on he Volailiy of Underlying Russian Socks 163 financial crisis. Therefore higher levels of volailiy for Sberbank could have been a sysemaic response o he uncerainy in he global financial services secor a ha ime raher han a resul of he inroducion of SSF. The GARCH(1,1) parameers for he oal, pre-fuures and pos-fuures periods are given in Table 5. Uncondiional variance for he oal sample and he sub-periods can be esimaed as α 0 /(1-α 1 -β 1 ). A change in uncondiional variance afer he inroducion of he SSF will show is effec on he volailiy of he underlying sock. In he RTS marke he uncondiional variance afer he inroducion of he SSF is lower han ha of he pre-fuures uncondiional variance for all socks excep Sberbank. Similar resuls Table 5. GARCH(1,1) Model Parameers a he, Pre-Fuures and Pos-Fuures Period Panel A: RTS marke Firm a 0 Lukoil Roselecom Surgunefgas Norilsk Nickel Sberbank (1.7591) *** (0.3123) (2.0454) ** (1.8265) *** (3.0421) * (0.1753) (1.4578) (0.0918) (2.1181) ** (0.0990) (1.4168) (0.6644) (2.7939) * (1.9338) *** (1.0213) a ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * α (1.6843) *** (2.2875) ** (1.0878) (2.4243) ** (1.9239) *** (2.8055) ** (3.1876) * (1.9645) ** (2.5960) * (1.5290) (1.4245) (3.3544) * (2.5824) * (8.4401) * (2.3736) ** α (2.3247) ** (2.5910) * (1.1265) (3.1792) * (1.9733) ** (2.5379) ** (4.4235) * (3.3532) * (3.1011) * (2.1269) ** (1.9659) ** (2.6613) * (3.0229) * (1.6375) (2.5089) ** β ( ) * (4.7869) * (0.0664) *** ( ) * (2.5410) ** ( ) * (8.8695) * ( ) * (3.0771) * ( ) * (5.9008) * (2.6679) * (3.6124) * (3.7725) * (2.4723) ** α 0 /(1-α 1 -β 1 ) (α 1 +β 1 )

10 164 Global Business and Finance Review Fall 2010 Table 5. GARCH(1,1) Model Parameers a he, Pre-Fuures and Pos-Fuures Period (Con.) Panel B: MICEX marke Firm a 0 Lukoil Roselecom Surgunefgas Norilsk Nickel Sberbank (1.1538) (0.4254) (1.2031) (0.2730) (1.5246) (0.1634) (0.7147) (0.2554) (0.6911) (0.2264) (0.7770) (0.6421) (4.2002) * (3.2410) * (2.0889) ** a ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * (6.7949) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * ( ) * α (1.5014) (2.3923) ** (2.2528) ** (3.5684) * (1.9683) ** (6.0881) * (2.4789) ** (0.8422) (4.4885) * (2.9833) * (2.8515) * (2.6771) * (2.2838) ** (1.7148) *** (1.3695) α (3.4717) * (2.8041) * (3.7200) * (3.9038) * (2.9031) * (3.3838) * (5.3638) * (1.8966) *** (5.5241) * (3.8852) * (3.3442) * (2.8016) * (3.3393) * (2.3418) ** (2.2745) ** β ( ) * (4.6902) * (7.1801) * ( ) * (9.4568) * (2.3258) ** ( ) * (2.9401) * (0.7825) (6.1875) * (0.9283) (7.8282) * (9.3061) * (7.2371) * ( ) * α 0 /(1-α 1 -β 1 ) (α 1 +β 1 ) * ** *** are also observed for he MICEX marke, which is again an indicaion ha he inroducion of he SSF has reduced he volailiy of he underlying sock. To furher emphasize ha he inroducion of SSF did no increase volailiy, i should be noed ha all socks (wih only one excepion where he esimaed coefficien is perfecly zero) had coefficiens wih negaive signs. In oher words, wheher he effec was saisically significan or no, he direcion owards a reducion in volailiy was nearly uniform across all socks. As saed in Engle and Bollerslev (1986), if he oal of he GARCH parameers (α 1 +β 1 ) is greaer han 0.9, i is an indicaion ha he persisence of he shocks o he volailiy is permanen. In he case RTS marke he sum of GARCH parameers are greaer han 0.9 for he oal sample for Lukoil, Roselecom, and Norilsk Nickel indicaing he persisence of shocks. For Surgunefegas only he pre-

11 Jihendranahan & Vang Impac of Single Sock Fuures on he Volailiy of Underlying Russian Socks 165 fuures values are greaer han 0.9. In he case of MICEX marke he sum of GARCH parameers are greaer han 0.9 for he oal sample of Lukoil, Roselecom and Surgunefegas. In he case of Roselecom he pre-fuures values are greaer han 0.9, while he same is rue for he pos-fuures parameers for Sberbank. Table 6. Fuures Trading Aciviy vs. Condiional Volailiy of Individual Socks VAR Resuls Panel A: Dependen Variable Volailiy; Independen Variable Volume/Open Posiions Independen Variable LKOH (-sas) RTKM (-sas) SNGS (-sas) GMKN (-sas) h ( ) * (5.1444) * ( ) * ( ) * h (1.1707) (0.4569) (3.2078) * (0.5556) h (0.5202) (0.5125) (0.6437) (0.4111) h (1.3117) (0.9481) (1.0819) (0.8313) h (1.7506) *** (0.4312) (2.7571) * (1.3807) h (0.8991) (0.7967) ( (0.0411) h (2.6443) * (1.1171) (0.6439) (0.2327) h (2.6539) * (0.1628) ( ** (0.6652) h (0.6917) (0.1190) ( ) (0.6917) r (0.1191) (0.5851) (0.1952) (0.7113) r (0.5860) (0.1535) (0.3752) (0.7942) r (1.1564) (0.4002) ( (1.0287) r (0.0300) (0.9544) (1.0839) (0.4931) r (0.1454) (1.8684) *** (0.6413) (0.5419) r (0.4369) (1.4005) (0.5664) (0.9967) r (0.0747) ( ) (0.2200) (0.1107) r (0.5703) (0.9149) (0.5819) (0.0109) r (0.6444) Consan (5.5812) * V OI does no Granger (1.0820) (5.0719) * cause h (F-sas) * ** *** (0.2065) (3.6444) * (0.8342) (4.8481) * SBER (-sas) ( ) * (0.2447) (2.5487) ** (1.2358) (1.7161) *** (0.7069) (1.6084) (0.8929) (0.6951) (1.4924) (0.4208) (3.8736) * (0.9897) (1.3077) (0.6602) (0.6873) (0.9050) (0.3327) (2.9573) * *

12 166 Global Business and Finance Review Fall 2010 Table 6. Fuures Trading Aciviy vs. Condiional Volailiy of Individual Socks VAR Resuls (Con.) Panel B: Dependen Variable Volume/Open Posiions; Independen Variable Volailiy Independen Variable LKOH (-sas) RTKM (-sas) SNGS (-sas) GMKN (-sas) h * (0.0815) (0.8303) (2.6141) (2.6408) * h (0.5289) (2.0736) ** (2.7030) * (2.2875) ** h (0.7294) (0.4646) (0.5470) (0.0932) h (0.0278) (1.4594) (0.4700) (0.5650) h (0.0190) (0.1519) (0.5661) (0.5740) h (0.2502) (0.4895) (0.9204) (0.1122) h (0.5890) (0.2410) (0.2709) (1.3213) h (0.5069) (1.1224) (0.6210) (0.0460) h (0.7009) (0.4117) (0.6522) (1.2624) r (8.8067) * (7.3883) * (7.9829) * (7.2069) * r (3.1535) * (2.2988) ** (2.1669) ** (1.4747) r (1.5581) (0.4133) (0.7025) (1.9337) *** r (1.9214) *** (2.1361) ** (2.0939) ** (2.1747) ** r (1.9928) ** (1.8536) *** (0.9493) (0.2655) r (0.5958) (1.7070) *** (0.6949) (0.9035) r (0.5929) (1.2097) (1.0035) (0.0657) r (1.1521) (1.4989) (0.4181) (0.4189) r SBER (-sas) (2.0838) ** (1.1974) (0.2770) (0.2553) (2.1681) ** (1.0435) (0.7917) (1.0604) (0.4484) (8.8992) * (1.2840) (0.1586) (2.4253) ** (0.7195) (0.4985) (0.0307) (1.7332) *** (1.1205) (1.3510) (1.8148) *** (1.8258) ** (1.9271) *** Consan (1.6906) *** (0.9373) (2.4721) ** (2.6260) * (0.4489) h does no Granger V *** cause OI (F-sas) * ** *** The excepion for Sberbank being a sock ha did no experience a reducion in uncondiional variance afer he inroducion of SSF is consisen wih he general rising uncerainy among financial services firms during he ime period ha preceded he global financial crisis.

13 Jihendranahan & Vang Impac of Single Sock Fuures on he Volailiy of Underlying Russian Socks 167 The resuls of he lead-lag relaionship beween he fuures rading aciviy and he volailiy of he underlying sock are given in Table 6. Since here is srong similariy in he resuls of RTS and MICEX markes, for breviy, only he resuls of he MICEX marke is repored. Only in he case of Roselecom and Sberbank do he lagged values of he fuures rading aciviy have significan effecs on he volailiy of he underlying sock. The lagged values of he volailiy iself had significan effec on he volailiy of all five socks sudied. The effecs of volailiy on rading aciviy are more ineresing. Excep for Lukoil, all oher four fuures rading volumes are significanly affeced by he lagged values of volailiy. This is an indicaion ha during imes of high volailiy invesors may be using he fuures markes for hedging purposes and his migh be he reason for high fuures rading aciviy. In all five cases he lagged variables of he fuures rading volume had significan effecs on fuures rading aciviy. This is an indicaion of periods of persisen high rading aciviy in he fuures markes. Granger causaliy ess on wheher fuures marke rading aciviy causes he changes in underlying sock volailiy are generally insignifican, excep in he case of Sberbank. In he case of Surgunefegas here is weak evidence ha volailiy causes increase in fuures rading aciviy. Overall conclusions ha can be drawn from hese resuls are ha here is very limied causal effec beween he underlying sock volailiy and he rading aciviy in he fuures markes. V. Conclusion The cenral quesion ha was examined in his paper is he role of derivaives in reducing he volailiy of emerging sock markes. Specifically, he inroducion of SSF in he Russian markes is looked a wih respec o he possible resuls on Russian sock behavior. The paricular issues ha were looked a included wheher he use of SSF corresponded o a change in sock marke rading volume, wheher sock-reurn sandard deviaions increased or decreased afer he inroducion, and wheher he changes in volailiy are significan when using GARCH mehodology. In general, given he five socks analyzed, he resuls found ha he inroducion of SSF has a somewha posiive-o-mixed effec on he volume of rading, and ha persisen periods of high volailiy seem o lead o more SSF use. Mos imporanly, i was found ha he overall long-erm volailiy of sock reurns has generally decreased for he socks in his sample since he inroducion of hese insrumens. When a comparison of basic descripive saisics is made before and afer he inroducion of SSF, i was found ha in mos cases, bu no all, he sandard deviaions of individual sock reurns decreased afer inroducion among he five socks used in his paper in boh he RTS and MICEX markes. When he issue of volailiy was examined using he GARCH mehodology, i was found ha he inroducion of SSF resuled in saisically significan reducions in volailiy in wo ou of five socks on boh markes. In he oher socks he coefficien signs were almos always consisen wih a decline in volailiy bu he effecs were no saisically significan. Furhermore, when he esimaions are done on a oal, pre-fuures and pos-fuures basis, he uncondiional variance decreased pos-fuures for every sock excep one on boh markes, and ha frequenly, he persisence of he reducion seemed o be permanen. Poenial areas for furher sudy would include he heoreical quesion of wha is he ransmission mechanism of reduced volailiy, is i a resul of resricions on shor-selling or oher reasons, and under wha cases would here be excepions? Addiional areas could also include: Does he endency of SSF in reducing volailiy hold in oher emerging markes besides Russia, and if no, wha is he explanaion?

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