The relationship between futures market and spot market volatility: An application on Izmir Futures and Options Market

Volatilities in financial markets increase the importance of risk management and futures markets in terms of investors. Derivative market interacts with the spot markets continously. Therefore, the question of how the direction of the interaction between the two markets turns out to be an important research topic for academicians, brokers and market makers. For that reason, this study aims to investigate the relationship between the derivative market and the spot market volatility by using the data belonging to the period of 02.05.2005-30.07.2010.In this study, the casual relation between the derivative returns of ISE 30 index and dolar trading at Turkish Derivatives Exchange (VOB) and related spot market volatility was examined via the Granger Causality Test. Furthermore, the question of whether the derivative increase the volatility of spot market is tested via the VAR model. Bi-directional causality relation is found between the derivative market and volatility of stock market and foreign exchange market. In addition to this, it is found that future market decreases the volatility of stock market but increases the foreign exchange market.