Volatility, Expiration Day Effect and Pricing Efficiency: Kuala Lumpur Composite Index Futures

Fauzias Mat Nor, Tea Lee Choo

Abstract


A study was conducted on issues related to the introduction and trading of Kuala Lumpur Composite Index futures contract in Malaysia. Issues related to volatility, expiration day effect and pricing efficiency were examined. The test (using Levene test) indicated that a decrease in volatility was observed after the futures trading. Most component stocks in KLSECI show a significant decrease in volatility in the post-futures period than their NON- KLSECI components. These noted changes were not uniform and were dependent upon individual stocks and industry sectors. It might be due to the existence of futures market which led to a stability effect by increasing information flow and market liquidity, as well as by reducing market risk by providing hedging opportunities. It is concluded that futures volatility is significantly higher, especially where there are big price movements of the underlying assets. No evidence of any expiration day effect was found. The test of mispricing shows frequent underpricing than overpricing. if transaction costs is included, it show very little mispricing.

Abstrak

Satu kajian telah dilakukan ke atas isu yang berkait dengan pengenalan dan urusniaga niagaan ke depan indeks komposit Kuala Lumpur di Malaysia. Kajian ini melibatkan isu kemeruapan, kesan hari perlupusan clan kecekapan harga. Ujian (dengan menggunakan ujian Levene) menunjukkan penurunan dalam kemeruapan selepas permulaan urusniaga posaran niagaan ke depan. Kebanyakan saham komponen indeks komposit menunjukkan penurunan yang besar dalam kemeruapan selepas wujudnya pasaran niagaan ke depan berbanding dengan saham-saham lain. Perubahan ini tidaklali seragam tetapi bergantung kepada saham individu dan sektor industrinya. Ini berkemungkinan akibat daripada kewujudan pasaran niagaan ke depan yang memberi kestabilan harga dengan cara meningkatkan aliran maklumat dan kecairan p asaran. di saniping niengurangan fisiko pasaran dengan mewujudkan peluang lindungan nilai. Kajian ini juga membawa kesimpulan bahawa kemeruapan p asaran niagaan ke depan adalali nyata lebih tinggi apabila berlaku perg erakan harga yang besar pada aset asas. Kajian juga mendapati tiada kesan hari perlupusan. Ujian kecekapan harga menunjukkan terkurang harga lebih kerap berbanding dengan terlebili harga. lika kos urusniaga dimasuk kira, terlebih dan terkurangnya harga adalah kecil.


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