Article
Effect of futures trading on the liquidity of underlying stocks: Evidence from Vietnam
- May 2022
- Pacific-Basin Finance Journal 73(2):101772
DOI: 10.1016/j.pacfin.2022.101772
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Abstract
Our paper investigates the effect of the introduction of the VN30 futures contract on the liquidity of thirty blue-chip underlying stocks in Vietnam stock market. Using the difference-in-difference approach with carefully matched stocks, we find the quoted spread and the Amihud illiquidity of the VN30’s component stocks increase after the introduction of index future trading. The decrease in liquidity is explained by a jump in the adverse selection costs proxied by the probability of informed trading (PIN) after such introduction. In addition, the prevalence of futures under-pricing indicates the lack of index arbitrage due to short-sale prohibition in the Vietnamese stock market.
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REV FINANC STUD
This article examines intraday transaction data for S&P 500 stock index futures prices and the intraday quotes for the underlying index. The data indicate that the futures price changes are uncorrelated and that the variability of these price changes exceeds the variability of price changes in the S&P 500 index. This excess variability of the futures over the index remains even after controlling for the nonsynchronous prices in the index quotes, which induces auto-correlation in the index changes. We advance and examine empirically two hypotheses regarding the difference between the futures price and its theoretical value: that this ‘mispricing’ increases on average with maturity, and that it is path-dependent. Evidence supporting these hypotheses is presented.
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Security Baskets and Index-Linked Securities
Article
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Jun 1991
Security baskets and index-lined securities are securities whose values are functions of the cash flows or values of other assets. Creation of these “composite” securities would seem to be redundant since investors can cost1ess1y replicate them. In this paper we study the existence and optimal design of composite securities. We first show that when some investors possess inside information, composite securities are not redundant. By holding composite securities, uninformed investors with unexpected needs to trade can reduce their expected losses to insiders. The existence of these securities will affect real investment decisions. We then show that when uniformed investors are heterogeneous with respect to nontradeable endowment risk, the size of such clienteles determines whether the portfolio for a liquidity trader consists of a clientele-specific composite or a single market composite combined with individual security holdings. In the latter case, markets for the composite security and its component securities coexist. No results depend on the existence of exogenous “noise” traders.
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Investor protection, adverse selection, and the probability of informed trading
Article
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Feb 2008
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Rev Quant Finance Account
The purpose of this study is to investigate the relation between investor protection, adverse selection, and the probability of informed trading. Previous research has established a direct relation between investor protection and firm liquidity, measured by bid-ask spreads and depths. In this study, we test the hypothesis that adverse selection is the mechanism through which poor investor protection leads to higher costs of liquidity. The Hong Kong equity market provides a unique opportunity to compare adverse selection differences across distinct investor protection environments, holding constant the trading platform and currency. Using various bid-ask spread decomposition models and probability of informed trading estimates, we confirm the hypothesized relation between investor protection quality and adverse selection costs. These findings contribute to the literature by establishing one of the links in the chain connecting investor protection to firm valuation.
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Presidential Address: Friction
Article
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Feb 2000
The sources of trading friction are studied, and simple, robust empirical measures of friction are provided. Seven distinct measures of trading friction are computed from transactions data for 1,706 NYSE/AMSE stocks and 2,184 Nasdaq stocks. The measures provide insights into the magnitude of trading costs, the importance of informational versus real frictions, and the role of market structure. The degree to which the various measures are associated with each other and with trading characteristics of stocks is examined. Copyright The American Finance Association 2000.
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Inferring Trade Direction from Intra-Day Data
Article
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Feb 1991
This paper evaluates alternative methods for classifying individual trades as market buy or market sell orders using intraday trade and quote data. The authors document two potential problems with quote-based methods of trade classification: quotes may be recorded ahead of trades that triggered them, and trades inside the spread are not readily classifiable. These problems are analyzed in the context of the interaction between exchange floor agents. The authors then propose and test relatively simple procedures for improving trade classifications. Copyright 1991 by American Finance Association.
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S&P 500 Cash Stock Price Volatilities
Article
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Dec 1989
S50P500stockreturnvolatilitiesarecomparedtothevolatilitiesofamatchedsetofstocks,aftercontrollingforcross−sectionaldifferencesinfirmattributesknowntoaffectvolatility.Nosignificantdifferenceinvolatilityisobservedbetween1975and1983−−beforethestartoftradeinindexfuturesandindexoptions.Sincethen,S50P 500 stock return volatilities are compared to the volatilities of a matched set of stocks, after controlling for cross-sectional differences in firm attributes known to affect volatility. No significant difference in volatility is observed between 1975 and 1983—before the start of trade in index futures and index options. Since then, S50P 500 stocks have been relatively more volatile. The difference is statistically, but not economically, significant. The relative increase occurs primarily in daily returns and only to a lesser extent in longer interval returns. Other factors besides the start of derivative trade could be responsible for the small increase in volatility. Copyright 1989 by American Finance Association.
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Article
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Feb 1987
This paper describes a simple method of calculating a heteroskedasticity and autocorrelation consistent covariance matrix that is positive semi-definite by construction. It also establishes consistency of the estimated covariance matrix under fairly general conditions.
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Investor Protection and Firm Liquidity
Article
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Feb 2003
The purpose of this study is to investigate the relation between investor protection and firm liquidity. We posit that less protective environments lead to wider bid-ask spreads and thinner depths because they fail to minimize information asymmetries. The Hong Kong equity market provides a unique opportunity to compare liquidity costs across distinct investor protection environments, but still within a common trading mechanism and currency. Our empirical findings verify that firm liquidity is significantly affected by investor protection. Regression and matched-sample results show that Hong Kong-based equities exhibit narrower spreads and thicker depths than their China-based counterparts. Copyright (c) 2003 by the American Finance Association.
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Article
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Feb 1997
Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people’s capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them. Copyright 1997 by American Finance Association.
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Taxes and the Pricing of Stock Index Futures
Article
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Jun 1983
The paper reports the results of an empirical study of the price relation between the German Performance Stock Index, DAX, and DAX futures. An ex-ante arbitrage strategy based on arbitrage signals is analyzed. The data set contains intraday bid- and ask futures quotes and index values on a minute by minute basis. It is found that the number and persistence of arbitrage opportunities differs considerably for futures nearest to deliver as compared to futures which are not nearest to deliver. The findings suggest that arbitrageurs trade mainly in futures nearest to deliver. The risk associated with arbitrage trading is found to be very small so that arbitrage profits are nearly risk free. —
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