The impact of H-share derivatives on the underlying equity market |
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Authors: | Steven Shuye Wang Wei Li Louis T W Cheng |
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Institution: | (1) School of Accounting and Finance, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong |
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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.
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Keywords: | Stock index derivatives Volatility Liquidity Difference-in-difference approach |
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