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...
Abstract: Liquidity 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 ...
Citations
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TL;DR: In this paper , the authors apply three asset pricing models (CAPM, Fama-French three and five-factor models) to estimate the cost of equity for the Indian energy and infrastructure sectors.
5 citations
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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TL;DR: The authors studied a panel of 147 banks from 14 African countries between 2011 and 2017, using two competing non-parametric and parametric approaches for efficiency analysis and found that despite conflicting bank efficiency interpretations, both investigations corroborate the existence of widespread inefficiency of markets in Africa, which is likely strengthened by harmful fragmentation in the continent's financial/capital markets, market illiquidity, a lack of transparency, and informational inefficiency.
Abstract: Abstract Sparked by the ongoing advocacy for Africa’s derivatives initiatives, this work seeks to uncover the linkage between derivatives use and the business lending efficiency of banks in selected African economies. We studied a panel of 147 banks from 14 African countries between 2011 and 2017, using two competing non-parametric and parametric approaches for efficiency analysis. Respectively, Simar and Wilson’s (2007) two-stage double-bootstrap techniques (non-parametric) and an ML-based Bayesian SFA model (parametric) reflect the desired dynamic (instead of static) efficiency representations for panel analyses. Despite conflicting bank efficiency interpretations, both investigations corroborate the existence of widespread inefficiency of markets in Africa, which is likely strengthened by harmful fragmentation in the continent’s financial/capital markets, market illiquidity, a lack of transparency, and informational inefficiency, among others.
2 citations
References
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TL;DR: In this article, the authors provide a synthesis of the current methods, and also show the impact of market integration on the real sector, and provide a systematic method to date the liberalization of emerging equity markets.
Abstract: Equity market liberalizations, if effective, lead to important changes in both the financial and real sectors as the economy becomes integrated into world capital markets. The study of market integration is complicated because there are many ways one can liberalize and many countries have taken different routes. To study the effectiveness of particular liberalization policies, the sequencing of liberalizations, and the impact on the real economy, systematic methods must be developed to 'date' the liberalization of emerging equity markets. We provide a synthesis of the current methods, and also show the impact of liberalization on the real sector.
255 citations
Additional excerpts
...Bekaert et al. (2003) use this measure to examine the impact of liquidity on expected returns in emerging equity markets....
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TL;DR: In this paper, the authors examined the impact of stock option listings on several aspects of the market quality of the underlying stocks, including the variance of the pricing error, the adverse selection component of the spread, and the relative weight placed by the specialist on public information in revising prices for the underlying stock.
Abstract: We find that option listings are associated with a decrease in the variance of the pricing error, a decrease in the adverse selection component of the spread, and an increase in the relative weight placed by the specialist on public information in revising prices for the underlying stocks. We also find that there is a decrease in the spread and increases in quoted depth, trading volume, trading frequency, and transaction size after option listings. Overall, our results suggest that option listings improve the market quality of the underlying stocks. THIS STUDY EMPIRICALLY examines the impact of stock option listings on several aspects of the market quality of the underlying stocks. The motivation for this examination is to provide new and comprehensive evidence on whether stock options, in particular, and derivative securities, in general, have a beneficial or a harmful effect on the market for the underlying securities. We show that the previously documented decrease in the bid-ask spread following option listings is accompanied by an increase in the number of contracts the specialist is willing to trade at the quoted prices (quoted depth). Furthermore, the spread decreases and the depth increases even after controlling for changes in trading volume, volatility, and price. Lower spread and higher depth together provide unambiguous evidence of higher liquidity, and suggest that larger trades can be executed at lower transaction costs after option listings. Consistent with this, we find that the increase in trading volume after option listing is a combined effect of higher trading frequency and larger average transaction size.
240 citations
"The Impact of Derivative Trading on..." refers background or methods in this paper
...Kumar et al. (1998), in a comprehensive analysis, investigate the impact of derivative listings on the market quality of underlying stocks in terms of liquidity, information asymmetry, and pricing efficiency....
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...Following Kumar et al. (1998), regressions with the ratio of illiquidity of a stock were estimated before listing and after listing as dependent variable and the ratio of postlisting to pre-listing trading volume, average price, and variance as independent variables....
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...Earlier studies showed that the liquidity of stocks was also affected by changes in volume, volatility, and price levels (Kumar et al., 1998)....
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...Kyle (1985) and Harris (1990) identify three aspects or dimensions of liquidity namely tightness, depth, and resiliency (Figure 1)....
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234 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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TL;DR: In this paper, the authors analyzed an equilibrium in which a call option (derivative asset) is traded and the equilibrium stock price (primary asset) increases when the options market is opened.
Abstract: The traditional pricing methodology in finance values derivative securities as redundant assets that have no impact on equilibrium prices and allocations. This paper demonstrates that, when the market is incomplete, primary and derivative asset markets, generically, interact: the valuation of derivative and primary security prices depend on the contractual characteristics of the derivative assets available. In a version of the Mossin mean-variance model, the authors analyze an equilibrium in which a call option (derivative asset) is traded and the equilibrium stock price (primary asset) increases when the options market is opened. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
231 citations
"The Impact of Derivative Trading on..." refers background in this paper
...In this context, Detemple and Selden (1991) show that the positive price effect associated with derivative listing may result in a decline in returns volatility....
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...Detemple and Selden (1991) show that when the market is incomplete, the derivatives market and the underlying securities market will, in general, interact and hence the valuation of the derivative and the underlying security is a simultaneous problem....
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TL;DR: The authors examined stock market volatility before and after the introduction of equity-index futures trading in twenty-five countries, using various models that account for asynchronous data, conditional heteroskedasticity, asymmetric volatility responses, and the joint dynamics of each country's index with the world-market portfolio.
Abstract: This article examines stock market volatility before and after the introduction of equity-index futures trading in twenty-five countries, using various models that account for asynchronous data, conditional heteroskedasticity, asymmetric volatility responses, and the joint dynamics of each country’s index with the world-market portfolio. We found that futures trading is related to an increase in conditional volatility in the United States and Japan, but in nearly every other country, we found either no significant effect or a volatility-dampening effect. This result appears to be robust to model specification and is corroborated by further analysis of the relationship between volatility, trading volume, and open interest in stock futures. An increase in conditional covariance between country-specific and world returns
205 citations
"The Impact of Derivative Trading on..." refers background in this paper
...Shenbegraman (2004) quotes from a study of 25 countries done by Gulen and Mayhew (2000) that derivatives trading is associated with increased vola- tility in the US whereas the volatility was lower in many countries which introduced derivative subsequently....
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