Abstract Whenever high market volatility occurs, the tendency seems to be to blame it on whatever new is going on at the time. One of the most (if not the most) extraordinary innovations to occur in financial markets in recent years has been the advent and explosive growth of equity futures trading. It is hardly surprising that futures, particularly equity index futures, have been singled out as a possible cause of the recent market volatility. To focus only on recent events, however, is to ignore most of the evidence. Equity futures began trading in 1982, so there exists a substantial body of data for use in testing the argument that financial futures trading has increased cash market volatility. To date, this evidence does not support the contention that stock index futures trading has destabilized the market. The day-to-day price volatility of the stock market over the 16-year period from 1972 to May 1987 does not indicate that the introduction of futures trading resulted in an increase in stock price volatility. In fact, market volatility in the S&P 500 was greater in 1973-82, before futures trading began, than it was in the 1982-86 post-futures period. While there is evidence of futures-induced short-run volatility, such as that occurring on futures contract expiration days, this volatility does not appear to carry over to longer periods of time.
