THE IMPACT OF THE LEVERAGE PROVIDED BY THE FUTURES ONTHE PERFORMANCE OF TECHNICAL INDICATORS:EVIDENCEFROMTURKEY

Although in developed countries the futures markets have been in existence sincemid-nineteenth century, they are relatively new in the developing countries. In thelate twentieth and early twenty first century, many new futures exchanges wereestablishedin developing countries and in the majority of these newly establishedexchanges substantial growth in futures trading have been observed within a smallperiod of time. This fast growth in the futures trading volume was mainly due tothe tremendous leverage the futures provides to speculators. Thanks to futuresmargining system, by committing only a small fraction of the money needed tomaintain a position on the underlying security in the spot market, a speculator canattain a much higher return potentialby buying or selling a futures contract. Thispaper studies this effect by employing daily return data on 19 selected stockslisted continuously in IMKB-30 (Istanbul Stock Exchange 30,Turkey) fromJanuary 2005 to December 2010. Populartechnical indicators are used to generatebuy and sell signals in both the spot market (Istanbul Stock Exchange) and thefutures market (VOB, a fast growing derivatives exchange located in İzmir,Turkey). The profit/loss resulting from trading strategies are then calculated andcompared. The results of the study show that, although the amount invested inboth markets is the same, the profit generated from the strategies applied onfutures is significantly higher than that on spot market.A CAPM (Capital AssetPricing Model) based hedge ratio is used to apply the trading strategies generated from spot market data on futures. The results show that this strategy generatessuperior returns in the futures market