The impact of H-share derivatives on the underlying
Steven Shuye Wang Æ Wei Li Æ Louis T. W. Cheng
Published online: 4 June 2008
Ó Springer Science+Business Media, LLC 2008
Abstract We conjecture that an introduction of the Hong Kong Hang Seng Chinese
Enterprise Stock Index (H-share Index) futures induces additional speculating activities in the
underlying equities, leading to an increase in volatility and volume of the underlying stocks.
Whereas, a subsequent introduction of H-share index options increases the level of informed
trading and opens up opportunities for speculative and arbitrage activities using futures
directly against options. These futures and options trading activities are much cheaper and
more efﬁcient than using the underlying stocks, leading to a signiﬁcant decline in spot market
volatility and volume. Our results are consistent with these arguments. We also ﬁnd that
derivative trading does not change the liquidity of H-share constituent stocks. Further tests
based on the difference-in-difference approach conﬁrm that the above ﬁndings are robust.
Keywords Stock index derivatives Á Volatility Á Liquidity Á
JEL classiﬁcation G10 Á G13 Á G15
The debate on the effect of derivatives trading on the spot equity market is interesting but
inconclusive. Derivatives proponents suggest that derivatives trading leads to a stronger
participation of informed investors in the cash market (Danthine 1978; Campbell et al.
S. S. Wang Á W. Li Á L. T. W. Cheng (&)
School of Accounting and Finance, The Hong Kong Polytechnic University, Hung Hom,
Kowloon, Hong Kong
S. S. Wang
Rev Quant Finan Acc (2009) 32:235–267