Index warrant trading and the underlying index volatility: The case of Istanbul Stock Exchange

The Istanbul Stock Exchange introduced warrant trading in 2010. Index warrant trading was expected to lower the volatility of the underlying ISE-30 index. This study examines the effect of index warrant trading on the volatility of the index. The research period was divided into two: the pre-warrant period and post-warrant period. The pre-warrant period, from August 13, 2009, to August 12, 2010, preceded the introduction of index warrant trading. The post-warrant period extended from August 13, 2010, to August 2, 2011. In order to capture the ex-ante and ex-post varying volatility of the underlying index, the study employed a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model. For the purpose of the study, a GARCH (1,1) model with a dummy variable was developed. The results show that index warrant trading did not lead to a decline in the volatility of the underlying ISE-30 index during the research period.