Financial volatility and derivatives products: a bidirectional relationship
Financial volatility and derivatives products: a bidirectional relationship

Summary/Abstract: This paper studies the dynamics of the relationship between the volume of transactions with derivative products and prices volatility of their underlying asset. This relation was widely approached, but mainly from the perspective of the impact of derivative products on the volatility of their underlying assets. The fact that hedging as well as speculative operations with derivative products are based on the price volatility of their underlying asset leaves a priori room to the idea according to which the volume of activity related to derivative products has to follow in a unidirectional manner the price volatility of the underlying assets. However, more recently, the possibility of a bidirectional relationship was put forward, supported by a certain markets imperfection and by an informational asymmetry between the traders. We look into this causality relationship considering the equity index products (futures and options) and the stock exchange markets which are members of the Euronext.liffe, except for the Lisbon. We compute a VAR and we perform causality tests in the sense of Granger. In general, it seems difficult to formulate a firm conclusion on the informational content of the derivative markets and on the object (hedging or speculation) of the dominant operations, in the context in which the causality relationships which occur differ considerably between one product and another and between one country and another.

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