The impact of index futures trading on underlying stock index volatility: Empirical evidence from Vietnam on VN30: Khóa luận tốt nghiệp Đại học / Lê Chí Trung

LE CHI TRUNG

THE IMPACT OF INDEX FUTURES TRADING

ON UNDERLYING STOCK INDEX

VOLATILITY: EMPIRICAL EVIDENCE FROM

VIETNAM ON VN30

GRADUATION THESIS

MAJOR: FINANCE – BANKING

CODE: 7340201

HO CHI MINH CITY, 2018

STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING

BANKING UNIVERSITY OF HO CHI MINH CITY

___________

LÊ CHÍ TRUNG

THE IMPACT OF INDEX FUTURES TRADING ON

UNDERLYING STOCK INDEX VOLATILITY:

EMPIRICAL EVIDENCE FROM VIETNAM ON

VN30

MAJOR: FINANCE – BANKING

CODE: 7340201

SUPERVISOR:MsC. NGUYỄN MINH NHẬT

HO CHI MINH CITY, MAY 2018

STATE BANK OF VIETNAM MINISTRY OF EDUCATION AND TRAINING

BANKING UNIVERSITY OF HO CHI MINH CITY

__________

ACKNOWLEDGEMENT

A completed study would not be done without any assistance. Therefore, the

authors who conducted this research would like to express our deepest gratitude my

supervisors Nguyen Minh Nhat for his supports, encouragement, invaluable academic

advice. Since this is a relatively new field at the Banking University of Ho Chi Minh

City in particular and of Vietnam in general, so this study required a lot of expertise

and knowledge of social psychology in finance. Finally, I would like to dedicate my

concluding words to all friends and fellows of mine. Without their support, the work

could not be done successfully.

The author would like to undertake research projects with the topic name “The

Impact of Futures Trading on Underlying Spot Market Volatility: Empirical

Evidence from Vietnam on VN30”. The figures and references are cited from clear

source and unity in the references. The contents and results of this study have not

been published in any public works until the present time. The author would like to

be responsible for my commitment.

Ho Chi Minh City, May 2018

Student in charge

Le Chi Trung

i

ABSTRACT

The onset of derivatives in Viet Nam and futures trading in specific may cause

the concerns in the participants in market. Over the world investors have started using

derivatives to manage their risks and futures is one of the most effective one. Since

derivatives markets interact continuously with spot markets, the effect of derivatives

markets on spot market volatility has become an important research topic.

The present study tries to estimate the effect of introduction of futures index

on the underlying stock volatility in Vietnamese stock market. To estimate the effect

of introduction of derivatives on stock market, GARCH family models which are

known for their ability to model volatility. Using these models, the asymmetric nature

of stock returns and the volatility of stock returns on the introduction of derivatives

are checked. Most of the previous studies break the sample period into two sub￾periods, one period before the introduction of futures trading and one after that

introduction. In this paper, we are going to use the same approach. In order to capture

the volatility, we apply at the same time the EGARCH (1,1), GARCH (1,1) models

for the pre-futures period and the post-futures period as well. The results of this study

indicate that the introduction of futures leads to a change in the spot market volatility

of the VN30 index but not significant and there is also the existence of leverage effect

and huge difference of ARCH and GARCH effect impact on spot price volatility in

each sub-period

ii

ABBREVIATION

WORDS MEANINGS

GARCH Generalized Autoregressive Conditional

Heteroskedasticity

EGARCH Exponential Generalized Autoregressive Conditional

Heteroskedasticity

IGARCH Integrated Generalized Autoregressive Conditional

Heteroskedasticity

ARCH Autoregressive Conditional Heteroskedasticity

OLS Ordinary Least Squares

FTSE London Stock Exchange

SSC State Securities Commission

HNX Hanoi Stock Exchange

BIST Borsa Instanbul Exchange

HOSE Ho Chi Minh Stock Exchange

NSE National Stock Exchange of India

CSI Stocks traded in the Shanghai and Shenzhen stock

exchanges

HSCEI Hang Seng China Enterprises Index

A50 Top 50 companies in the Shanghai Stock Exchange

iii

LIST OF TABLE

Table 2.1. Some typical previous research with GARCH Family models ... 27

Table 4.1. Descriptive and statistics of VN30 closing price in 10/2/2012 –

17/4/2018................................................................................................................ 43

Figure 4.2. VN30 Daily Closing Price Chart ......................................................... 43

Figure 4.3. VN30 Daily Logarithm Return Chart.................................................. 44

Table 4.4. Descriptive and statistics of VN30’s return in 10/2/2012 – 17/4/2018.

................................................................................................................................ 45

Table 4.5. Heteroskedasticity Test: ARCH Effect at latency 1 .......................... 46

Table 4.6. Heteroskedasticity Test: ARCH Effect at latency 7 .......................... 46

Table 4.7. Standard GARCH (1,1) model with dummy variable ........................ 47

Table 4.8. Standard GARCH (1,1) model in two sub-period ............................. 47

Table 4.9. Standard EGARCH (1,1) model with dummy variable ........................ 48

Table 4.10. Standard EGARCH (1,1) model in two sub-period............................ 50

iv

TABLE OF CONTENT

ABSTRACT ....................................................................................................................i

ABBREVIATION......................................................................................................... ii

LIST OF TABLE......................................................................................................... iii

CHAPTER 1: INTRODUCTION ................................................................................1

1.1. Necessity of the topic ...................................................................................1

1.2. Objectives and research questions................................................................3

1.2.1. Objectives..................................................................................................3

1.2.2. Research questions...................................................................................4

1.3. Research methodology ................................................................................4

1.4. Subject of the research................................................................................5

1.5. Scope of research .........................................................................................6

1.6. Significance of study....................................................................................6

1.7. Thesis structure............................................................................................7

CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW..........9

2.1. An overview of futures contract....................................................................9

2.1.1. Futures contract definition......................................................................9

2.1.2. Development of futures trading over the world ..................................10

2.2. Stock Index Futures Trading.......................................................................12

2.2.1. Index futures trading definition............................................................12

2.2.2. The onset of futures trading in Vietnam ..............................................14

2.3. Stock index volatility ....................................................................................16

2.3.1. Stock index in Vietnam ..........................................................................16