The implications of the presence of derivative instruments for price movements
in underlying financial markets are tested by comparing the variances of price
changes over different time horizons before and after the start of organised
derivatives trading. It is found that ratios of the variances of multi-day and
daily price movements decline for bond prices and stock indices in the United
States and Germany, though no such effect is found for Japanese bonds. For the
stock indices, the post-derivatives variance ratios are statistically
indistinguishable from those that would be characteristic of a random walk,
though this is not found to be the case for the bonds. This is interpreted to
mean that derivatives accelerate the incorporation of new information into
asset prices.