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Journal ArticleDOI

The Impact of Derivative Trading on the Liquidity of Stocks

01 Jul 2014-Vol. 39, Iss: 3, pp 51-66

TL;DR: In this article, the authors proposed that liquidity is an important factor for smooth trading for all assets including equities traded in the stock markets and that stock exchanges enable buyers and sellers to come together for transaction and in...

AbstractLiquidity is an important factor for smooth trading for all assets including equities traded in the stock markets. Stock exchanges enable buyers and sellers to come together for transaction and in ...

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Citations
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Journal ArticleDOI
31 Mar 2019
TL;DR: In this article, the effects of derivatives of the Vietnam Ho Chi Minh (VN) Stock Index and VN30 futures contract for the underlying stock markets were analyzed using the Exponential Generalized Autoregressive Conditional Heteroscedastic (EGARCH) model.
Abstract: In this paper, we analyze the effects of derivatives of the Vietnam Ho Chi Minh (VN) Stock Index and VN30 futures contract for the underlying stock markets. We use the data taken from daily transactions in the market so that the research results will be more objective and more accurate. Specifically, we apply the Exponential Generalized Autoregressive Conditional Heteroscedastic (EGARCH) model to analyze the data. The results illustrate that the occurrence of leverage effects in the profitability of VN30 and VN stock indexes and the liquidity of futures contract transactions have increased over time. The main contribution of this paper is that it is possible to predict the growth trend of derivative securities to make appropriate recommendations for investors. However, the evidence still has some limitations since it only assesses the impact of futures contracts during the specific time, which is the period of instruments that have just appeared.

4 citations


Cites background from "The Impact of Derivative Trading on..."

  • ...Narasimhan and Kalra (2014) consider the impact of derivative transactions on the liquidity of underlying stocks by using liquidity price impact measures....

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References
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Journal ArticleDOI

8,809 citations


"The Impact of Derivative Trading on..." refers background in this paper

  • ...Kyle (1985) and Harris (1990) identify three aspects or dimensions of liquidity namely tightness, depth, and resiliency (Figure 1)....

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Journal ArticleDOI
Yakov Amihud1
TL;DR: In this article, the authors show that expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock ex ante excess return partly represents an illiquid price premium, which complements the cross-sectional positive return-illiquidity relationship.
Abstract: This paper shows that over time, expected market illiquidity positively affects ex ante stock excess return, suggesting that expected stock excess return partly represents an illiquidity premium. This complements the cross-sectional positive return–illiquidity relationship. Also, stock returns are negatively related over time to contemporaneous unexpected illiquidity. The illiquidity measure here is the average across stocks of the daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firm stocks, thus explaining time series variations in their premiums over time. r 2002 Elsevier Science B.V. All rights reserved. JEL classificaion: G12

4,755 citations

Journal ArticleDOI
TL;DR: In this article, the effect of the bid-ask spread on asset pricing was studied and it was shown that market-observed expexted return is an increasing and concave function of the spread.
Abstract: This paper studies the effect of the bid-ask spread on asset pricing. We analyze a model in which investors with different expected holding periods trade assets with different relative spreads. The resulting testable hypothesis is that market-observed expexted return is an increasing and concave function of the spread. We test this hypothesis, and the empirical results are consistent with the predictions of the model.

3,909 citations

Journal ArticleDOI
TL;DR: In this article, the authors investigated whether marketwide liquidity is a state variable important for asset pricing and found that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity.
Abstract: This study investigates whether marketwide liquidity is a state variable important for asset pricing. We find that expected stock returns are related cross-sectionally to the sensitivities of returns to fluctuations in aggregate liquidity. Our monthly liquidity measure, an average of individual-stock measures estimated with daily data, relies on the principle that order flow induces greater return reversals when liquidity is lower. From 1966 through 1999, the average return on stocks with high sensitivities to liquidity exceeds that for stocks with low sensitivities by 7.5 percent annually, adjusted for exposures to the market return as well as size, value, and momentum factors. Furthermore, a liquidity risk factor accounts for half of the profits to a momentum strategy over the same 34-year period.

3,752 citations

Book ChapterDOI
01 Jan 2012
TL;DR: In this paper, the effects of stock illiquidity on stock return have been investigated and it was shown that expected market illiquidities positively affects ex ante stock excess return (usually called risk premium) over time.
Abstract: New tests are presented on the effects of stock illiquidity on stock return. Over time, expected market illiquidity positively affects ex ante stock excess return (usually called â¬Srisk premiumâ¬?). This complements the positive cross-sectional return-illiquidity relationship. The illiquidity measure here is the average daily ratio of absolute stock return to dollar volume, which is easily obtained from daily stock data for long time series in most stock markets. Illiquidity affects more strongly small firms stocks, suggesting an explanation for the changes â¬Ssmall firm effectâ¬? over time. The impact of market illiquidity on stock excess return suggests the existence of illiquidity premium and helps explain the equity premium puzzle.

2,463 citations


"The Impact of Derivative Trading on..." refers background in this paper

  • ...Price-impact measure: Amihud (2002) introduces a new measure for liquidity known as price-impact measure of liquidity which can be constructed from daily data....

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  • ...Hasbrouck (2009) shows Amihud’s (2002) price-impact...

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