Quantifying the effects of the inclusion and segregation of Contracts for Difference in Australian equity markets

Abstract

This study examines the effects that Contracts for Difference (CFDs) have had on theAustralian equity market, either as an accelerant for mispricing, or as a source of increased marketfunctionality through the addition of a new tradable product and increased liquidity. The AustralianSecurities Exchange (ASX) made the decision to segregate CFDs to a separate ring-fenced exchangein November 2007. This study uses EGARCH techniques to test for the effects of CFDs on returnvolatility at the time of CFD inclusion and segregation in Australian equity markets at the index andequity-specific level. A fully worked explanation and example of a CFD-influenced overhang is alsoprovided. The results provide evidence that cannot reject the presence of overhangs in Australianequity markets.