In 1995 the Chicago Mercantile Exchange (CME) introduced a Brazilian Real futures contract. This study explores whether the level of futures contract hedging activity has affected the volatility in Brazil’s equity market. As a proxy for volatility, a threshold autoregressive conditional heteroskedasticity (TARCH) model is employed to obtain the conditional variance of the log-daily returns in the BOVESPA, the Brazilian stock market index. Impulse response functions from a vector autoregressive (VAR) model are utilized to analyze the relationship between volatility and futures trading activity. The empirical results indicate that increased hedging activity has increased return volatility in Brazil’s equity markets.
Brown, C.J. and Curci, R. (2005), "BRAZILIAN REAL FUTURES TRADING AND VOLATILITY IN THE BRAZILIAN EQUITY MARKET", Arbelaez, H. and Click, R.W. (Ed.) Latin American Financial Markets: Developments in Financial Innovations (International Finance Review, Vol. 5), Emerald Group Publishing Limited, Bingley, pp. 99-111. https://doi.org/10.1016/S1569-3767(05)05006-5
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