Revisiting The Financial Volatility – Derivative Products Relationship On Euronext. Liffe Using A Frequency Domain Analysis

Résumé En

The present paper analyse the relationship between the volume of transactions with futures equity index products and the return volatility of their underlying assets. The study addresses the case of five stock markets, members of the Euronext.liffe: London, Paris, Amsterdam, Brussels and Lisbon. We employ a frequency domain analysis, using monthly data for the period 2001.09 – 2010.06, which allows us to identify the direction of the causality between the derivatives volume and the index return volatility. In addition, we test the relationship between the volume of futures contracts and both negative and positive shocks in terms of historical volatility of index return. Our results prove the frequency-causality only in case of Brussels financial market. For Lisbon the relationship exists, but it is not validated by the confidence level tests, while for London, Paris and Amsterdam, no causality can be observed. In case of Brussels, there is bidirectional causality at short and long run frequencies. The futures equity index volume Granger-cause the positive shocks in term of volatility at long run and the negative shocks at short run.