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Open AccessArticle

Volatility Integration in Spot, Futures and Options Markets: A Regulatory Perspective

1
Symbiosis Institute of Business Management (Pune), Pune 412115, India
2
Symbiosis International, Deemed University, Pune 412115, India
*
Author to whom correspondence should be addressed.
J. Risk Financial Manag. 2019, 12(2), 98; https://doi.org/10.3390/jrfm12020098
Received: 30 April 2019 / Revised: 24 May 2019 / Accepted: 28 May 2019 / Published: 9 June 2019
(This article belongs to the Special Issue Option Pricing)
The aim of this paper is to study the integration of volatility in the three markets, viz. spot, futures and options, in order to provide input for hedging purposes and the formulation of policies for derivatives. The generalized method of moments (GMM) is used to capture the simultaneous equation modelling of volatility in the three markets. The integration of the volatility in the three markets is also tested for structural breaks. The main finding of the paper is that the volatility in the options market is not associated with volatility in spot and futures market. However, volatility in spot and futures markets are associated with each other. As a consequence, investors can use options for hedging purposes and policy makers do not need to be concerned about the imminent impact of options markets on spot markets. To the best of the authors’ knowledge, there is no other study which discusses the integration of volatility in the three markets. Moreover, the finding of this paper that the options market behaves differently compared to the futures market has also not been discussed in earlier studies. View Full-Text
Keywords: GMM; structural breaks; volatility; integration; policy initiatives GMM; structural breaks; volatility; integration; policy initiatives
MDPI and ACS Style

Rastogi, S.; Athaley, C. Volatility Integration in Spot, Futures and Options Markets: A Regulatory Perspective. J. Risk Financial Manag. 2019, 12, 98.

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