This study examines stock market behavior related to the stock market volatility. The effect of the introduction of stock index futures on cash market volatility for KOSDAQ stock market is investigated.
First, the unconditional variances of the daily stock index returns for KOSDAQ index and KOSDAQ 50 index before and after the introduction of the index futures are investigated. Unconditional variances in pre-futures and post-futures periods are then compared to determine if the volatility has changed significantly after the introduction of the index futures. The result shows that the unconditional variance appears to have been changed in the post-futures period. But this result is valid only on the assumption of the normality of the stock index returns.
So, the conditional volatility of daily returns is also estimated through the GARCH (Generalized Autoregressive Conditional Heteroscedasticity) model with dummy variable. Estimated parameters of dummy variables of GARCH model are then examined to determine if the estimated parameters have changed significantly after the introduction of the index futures. The result suggests that the introduction of the index futures for the KOSDAQ has produced no significant structural changes in the conditional volatility of the stock market.
