ABSTRACT
This chapter focuses on a number of regulatory issues connected with index futures. A major interest of regulators is whether index futures have increased the volatility of the stock market. The stock market crash of October 1987 led to considerable concern about the connection between the created markets in index futures and the extreme volatility the spot market exhibited during October 1987. Four issues are of interest when considering the relationship between futures markets and share price volatility: the relative volatility of futures prices and the price of the underlying asset, the effect of creating a futures market on the price volatility of the underlying asset, the influence of programme trading on the price volatility of the underlying asset, and the effect of a futures market on the systematic risk of the shares in the index. Most of the potentially harmful linkages involve the introduction of distortions into the behaviour of spot prices by the trading of index futures.
