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Do Newly Listed Derivatives Affect the Market Risk Premium in a Thin Stock Market?

Nicolas Clerc
Swiss Federal Institute of Technology Zurich

Rajna Gibson
University of Geneva - Graduate School of Business (HEC-Geneva); Swiss Finance Institute

Abstract:
This study examines the effects on the stock market unitary risk premium and volatility associated with the listing of stock and stock index derivatives in Switzerland. Based on a univariate GARCH (1,1) specification of the stock index variance and a time-varying unitary risk premium representation, we can reject the hypothesis that stock and stock index derivatives listings do not affect the total risk premium. Contrarily to previous empirical evidence, we find that derivatives listings affect both the conditional market returns' variance and the unitary risk premium through structural shocks. The gradual market completion hypothesis is further corroborated in that, cumulatively, the three stock and stock index options futures derivatives listings reduced the unitary risk premium while the marginal impact of each successive listing decayed.

Keywords: futures, non-redundancy, options, time-varying risk premium, volatility

JEL Classifications: G0, G1, G2, G3

Working Paper Series

Date posted: July 03, 2001 ; Last revised: July 03, 2001

Suggested Citation

Clerc, Nicolas and Gibson , Rajna, Do Newly Listed Derivatives Affect the Market Risk Premium in a Thin Stock Market?. Available at SSRN: http://ssrn.com/abstract=275833 or doi:10.2139/ssrn.275833

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Contact Information

Nicolas Clerc (Contact Author) Swiss Federal Institute of Technology Zurich ( email ) ETH-Zentrum CH-8092 Zurich Switzerland
Rajna Gibson University of Geneva - Graduate School of Business (HEC-Geneva) ( email ) 40 Boulevard du Pont d'Arve 1211 Geneva 4 1205 Switzerland +41.22.379.89.83 (Phone)
Swiss Finance Institute ( email ) c/o University of Geneve 40, Bd du Pont-d'Arve 1211 Geneva CH-6900 Switzerland