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The Effect of Index Warrant Trading on the Underlying Volatility in the Post-Crisis Period
Abstract
The global financial crisis of 2007-2008 led to a sharp decrease in asset prices and increased volatility in financial markets. Before the crisis, warrant trading was often justified by assuming a more stabilised complete market and lower volatility. The Istanbul Stock Exchange introduced a warrant market and trading of ISE-30 index-based warrants in 2010. The chapter examines the impact of index-based warrant trading on the volatility of underlying ISE-30 index during post-crisis period of 2009-2011. The study employed a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) approach. In order to scrutinize the influence of index warrant trading on the volatility of underlying, two GARCH (1,1) models were specified; one included the volume of index warrants in the conditional mean equation and the other included a dummy variable in the conditional variance equation. The results show that index warrant trading did not lead to lower underlying volatility over the post-crisis period.
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