The Impact of GNMA Futures Trading on Cash Market Volatility

Abstract

[Excerpt] A general conclusion that can be drawn from theoretical analyses of spot market volatility when futures markets exist is best summarized by Turnovsky [1983, p. 1364] who states "under their (theoretical studies) respective assumptions, the futures market almost certainly stabilizes the “spot price." This suggests that trading in futures contracts may originate when cash markets experience considerable volatility. Indeed, futures trading on a variety of financial instruments was initiated shortly after periods of historically high interest rates.