Asymmetric causality between futures contracts and the return volatility of their underlying assets on Euronext.liffe

The present paper analyzes the relationship between the volume of transactions with equity index futures and the return volatility of their underlying assets. The study addresses the case of five stock markets, members of the Euronext.liffe, namely: Amsterdam,Brussels, Lisbon, London and Paris. The novelty of our paper is the use of the hidden cointegration technique to highlight the asymmetric relationship between derivatives and financial volatility. For this purpose we determine both the historical and conditional volatility of stock index returns. The results show that, in general, the hidden cointegration can be observed in case of small stock markets as Brussels and Lisbon, where both speculative and hedging activitiesare present. In case of the largest stock markets, the hidden cointegration is less obvious and the strategic investments prevail. In addition, the existence of hidden cointegration relationships is better revealed when we consider the historical volatility. However, our results are sensitive to the methodology of computing the financial volatility or to the approach of assessing the hidden cointegration.