There is a general consensus that futures trading results in an increase in market volatility.

Question

Quizplus · Accepted Answer

The arguments concerning futures trading centre on whether futures trading increases the volatility of the underlying market.It is argued that futures trading attracts speculation and prices are subsequently driven away from fundamental values.Moreover,once price movements have begun,more speculators become attracted to the market,resulting in even greater volatility.Alternatively,it is argued that futures trading may lead to lower volatility in the underlying market.First,speculators may be attracted away from the underlying market to the lower cost futures market.Second,there may be greater information flow and dissemination as a result of two markets operating over the one asset.While the evidence is mixed,as different samples,markets and volatility measures yield different results,there is now reasonably conclusive evidence that futures trading does not increase the volatility of the underlying market.Moreover,in the case of equities,there is evidence showing that volatility in the underlying stock market actually decreases following the introduction of futures trading.In Australia,Hodgson and Nicholls (1991)document that there has been no change in the volatility of the stock market since the introduction of the SPI futures contract.

There Is a General Consensus That Futures Trading Results in an Increase