Futures trading and cash market volatility: Stock index and interest rate futures

An analysis of the day-to-day and intra-day price volatility of the stock market and of short-term debt instruments for the period 1973-1987 indicates that the introduction of financial futures trading has not destabilized cash markets or increased volatility for those assets. The analysis also finds no evidence linking futures trading to an increase in general market volatility. Futures trading apparently has induced some short-run volatility, such as that which occurs on futures contract expiration days, but that volatility does not carry over to longer periods of time. Thus, the recent volatility of stock and bond prices cannot likely be attributed to anything associated with futures trading. It is more likely that the volatility results from increasing uncertainty caused by the existence of widely recognized macroeconomic disequilibria.