Does derivatives trading destabilize the underlying assets? Evidence from the Spanish stock market

Abstract

This paper analyses the effect of the introduction of derivatives (futures and options) in the Spanish market on the volatility and on the trading volume of the underlying index. The period analysed covers from October 1990 to December 1994. To study this effect, a GJR model is used. It is found, that although the asymmetry coefficient has increased, the conditional volatility of the underlying index declines after derivative markets are introduced. The trading volume of Ibex-35 increases significantly. Consequently, the introduction of the derivative contracts in Spain confirms a decrease in uncertainty in the underlying market and an increase in liquidity, which possibly enhances their efficiency.

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