The introduction of electronically traded index futures and their impact on the underlying assets: the case of US index futures

This paper contributes to the understanding of whether the introduction of smaller-sized and electronically traded index futures induces price speculation and destabilises the underlying asset market. By using a modified univariate conditional volatility model to examine the major indexes in the USA, this paper finds that the average return on stocks declined following the introduction of trading in E-mini futures contracts. Both in the short run and the long run, the unconditional volatility increases in the three spot indices following the introduction of E-mini futures contracts. In general, our results show that the introduction of mini-sized electronically traded index futures increases the volatility of the underlying asset.