The impact of H-share derivatives on the underlying equity market

The impact of H-share derivatives on the underlying equity market 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The impact of H-share derivatives on the underlying equity market

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Publisher
Springer US
Copyright
Copyright © 2008 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-008-0094-7
Publisher site
See Article on Publisher Site

References

  • The effect of beta, bid-ask spread, residual risk, and size on stock returns
    Amihud, Y; Mendelson, H
  • Futures trading, spot market volatility, and market efficiency: the case of the Korean index futures markets
    Bae, SC; Kwon, TH; Park, JW
  • Futures-trading activity and stock price volatility
    Bessembinder, H; Seguin, PJ
  • Price limits and stock characteristics: Evidence from the Shanghai and Shenzhen Stock Exchanges
    Chen, G; Rui, O; Wang, S
  • The price effect of option introduction
    Conrad, J
  • Arbitrage, hedging, and financial innovation
    Dow, J
  • Futures trading and cash market volatility: Stock index and interest rate futures
    Edwards, FL
  • Futures trading and volatility in the GNMA market
    Figlewski, S
  • Options, short sales, and market completeness
    Figlewski, S; Webb, GP

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