Futures-Trading Activity and Share Price Volatility in South Africa

ABSTRACTThe study examines the relationship between futures-trading activity and equity volatility on the JSE for the three main indices. Contrary to findings in other markets, it is shown that positive correlation exists between equity volatility and expected and unexpected trading volumes in both the spot and futures markets. These conclusions seem robust to alternative specifications and indices used. Given an assumption of causality which runs from futures trading volumes to spot market volatility, the results are consistent with the idea that increasing trade in the futures market lead to greater volatility and price destabilisation in the share market.