VOLATILITY TRANSMISSION, ASYMMETRIC LINKAGES, AND SPILLOVER INDEX BETWEEN SINGLE STOCK FUTURES AND UNDERLYING STOCK OF COMMERCIAL BANKS OF PAKISTAN
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Abstract
In financial system derivatives have their important role which can be categorize in three forms like speculation, hedging, and arbitrage. Prices of derivatives are determined for future which provide investors some kind of assurance. In stock market two types of future instruments exist which are index futures and single stock futures. Single Stock Futures (SSF) have several advantages over spot market in terms of transaction cost, volume of futures, and leverage facility. PSX offer only one active product of derivatives which is Deliverable Futures Contract (DFC). DFC were initially introduced in 2005 with strict criteria later on in 2007 trading in DFC were banned which was later on resumed in 2009. Since then trading was continued in DFC. In 2022 stocks of 93 companies were listed in DFC. Objective of this study was to determine volatility transmission between single stock futures and underlying stock of commercial banks listed in Pakistan Stock Exchange. For this purpose BEKK-GARCH and Diebold and Yilmaz (2012) methodology were applied. Results of BEKK-GARCH had shown that in most of banks either no volatility transmission exist or it was exist with flow from stock futures to underlying stock. In one bank (Askari Bank) direction of transmission was from underlying stock to stock futures and in two banks Bank Al Habib and Habib Bank bi directional volatility transmission was found. Spillover index has shown that magnitude of spillover of underlying stock to stock future was more as compared to stock futures to underlying stock. Findings of the study helpful for traders in pulling out their hedging and arbitrage stratigies
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