The Effect of Information Flow from Futures Market on the Volatility of Spot Stock Market

In this paper, we evaluated two empirical aspects of the volatility of Korean stock market in the context of information flow. First, we investigated the impact of KOSPI 200 index futures trading on the volatility of its spot market. Using a dummy variable approach, we determined that the introduction of index futures trading increases spot market volatility. Second, we examined the volatility spillover between the KOSPI 200 spot and futures markets, using the bivariate GARCH-BEKK model. The results indicate the presence of unidirectional causality from futures to spot markets. This means that the KOSPI 200 futures market reacts to new information more quickly than its underlying spot market, and the KOSPI 200 futures market dominates its spot market, as the result of speculative trading.