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The impact of the introduction of index options on volatility and liquidity on the underlying stocks: Empirical evidence from the Asian stock markets
Umeå University, Faculty of Social Sciences, Umeå School of Business.
Umeå University, Faculty of Social Sciences, Umeå School of Business.
2011 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

The impact of the introduction of derivatives on the underlying stock is a debatable topic among the researchers. The issue is quite controversial as contradictory results have been obtained by researchers in various stock markets. The purpose of this study is to examine the volatility and the liquidity effect on the underlying stock after the introduction of index options. We have investigated volatility and liquidity effect by collecting sample data from the stock markets of India, Korea, Taiwan, Hong Kong, Japan, Thailand, Malaysia and Singapore, only markets which are offering index options in Asia.

 

Applying the generalized autoregressive conditional heteroscedasticity (GARCH) model, we have examined the conditional volatility of intraday (high frequency) returns for each stock market, before and after the introduction of index options. We have also examined the liquidity effect through t-test and Wilcoxon Signed Rank Test. We used t-test to determine the mean differences between the trading volume of pre-index and post-index options periods. 

 

By comparing the estimated parameters and the coefficient of conditional volatility in pre and post period of index options introductions, we have examined that the derivatives trading dramatically increases the persistence of the conditional volatility for all the selected stock markets. We also observed mixed evidence in context to liquidity effect. In the stock exchanges of Hong Kong, Japan, Korea, Taiwan and Thailand, we found that the respective markets become more liquid in the post index options periods in contrast to pre index options period. In these markets trading volume increased significantly after the introduction of index options.  On the other hand, India, Malaysia and Singapore stock markets show no liquidity effect in the post-index option period.

 

Finally, the empirical results of our study conclude that the introduction of index options on the selected Asian stock markets have increased in stock return volatility and liquidity on the underlying stocks.

Place, publisher, year, edition, pages
2011. , 79 p.
Keyword [en]
Derivatives, Volatility, Liquidity, Index Options, Intraday return, Trading volume, Conditional volatility, Stock return volatility, Impacts, Underlying stocks
National Category
Business Administration
Identifiers
URN: urn:nbn:se:umu:diva-45554OAI: oai:DiVA.org:umu-45554DiVA: diva2:430284
Presentation
2011-05-31, S302, Umeå School of Business, Umeå University, Umeå, 17:00 (English)
Uppsok
Social and Behavioural Science, Law
Supervisors
Examiners
Available from: 2011-07-08 Created: 2011-07-08 Last updated: 2011-07-08Bibliographically approved

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Citation style
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