Volatility Impact of Stock Index Futures Trading - A Revised Analysis

The recent financial crisis renewed concerns about a possible destabilizing impact of derivatives trading. Despite a very active research, the question whether or not derivatives tend to destabilize financial markets has not yet been answered to satisfaction. This contribution aims to revise the robustness of recent empirical findings and to remedy some methodological shortcomings of earlier studies. Acknowledging their practical relevance, we focus on futures and examine the volatility impact of DAX futures trading. Our results confirm a volatility-reducing impact of DAX futures trading, whereas the observed deterioration of the fundamental price building process proved to be statistically insignificant.