The Impact of Financial Derivatives on Financial Market Stability : Evidence from DAX Stock Index Futures Trading Using GARCH

Matanovic, Eva GND

Whether or not derivatives trading pose a threat to financial market stability is still an unresolved issue in a long-term controversy. The popular view among economists and policy makers claims that derivatives trading impairs financial market stability by increasing financial market volatility and creating new kinds of risks. This view has been, however, questioned on theoretical grounds, and empirical findings are still inconclusive. This thesis aims to avoid some methodological shortcomings of previous studies that might induce misleading results. Using the generalized autoregressive conditional heteroscedasticity (GARCH) framework to model stock market volatility, the analysis of the volatility impact of DAX futures trading covering a data sample from 1970 to 2009 suggests a stabilizing impact once the impact of other market-wide factors is properly controlled for. An observed deterioration in the fundamental price building process proves to be statistically insignificant.

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Matanovic, Eva: The Impact of Financial Derivatives on Financial Market Stability. Evidence from DAX Stock Index Futures Trading Using GARCH. Hagen 2009. FernUniversität in Hagen.

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