The Impact of H-Share Derivatives on the Underlying Equity Market

47 Pages Posted: 16 Jun 2008

See all articles by Steven Shuye Wang

Steven Shuye Wang

School of Business, Renmin University of China

Wei Li

Hong Kong Polytechnic University - School of Accounting and Finance

Louis T. W. Cheng

The Hang Seng University of Hong Kong - Department of Economics and Finance

Date Written: May 24, 2008

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.

Keywords: Stock index derivatives, Volatility, Liquidity, Difference-in-difference approach

JEL Classification: G10, G13, G15

Suggested Citation

Wang, Steven Shuye and Li, Tina Wei and Cheng, Louis T. W., The Impact of H-Share Derivatives on the Underlying Equity Market (May 24, 2008). Available at SSRN: https://ssrn.com/abstract=1145306 or http://dx.doi.org/10.2139/ssrn.1145306

Steven Shuye Wang (Contact Author)

School of Business, Renmin University of China ( email )

Beijing
China
8610-6251-8856 (Phone)

HOME PAGE: http://rbs.org.cn

Tina Wei Li

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Louis T. W. Cheng

The Hang Seng University of Hong Kong - Department of Economics and Finance ( email )

Hang Shin Link
Siu Lek Yuen
Shatin
United States

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