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

Steven Shuye Wang, Wei Li, Tsz Wan Cheng

Research output: Journal article publicationJournal articleAcademic researchpeer-review

7 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)235-267
Number of pages33
JournalReview of Quantitative Finance and Accounting
Volume32
Issue number3
DOIs
Publication statusPublished - 1 Apr 2009

Keywords

  • Difference-in-difference approach
  • Liquidity
  • Stock index derivatives
  • Volatility

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

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