The Effect of Single Stock Derivative Listings on Underlying Returns, Volume and Market Completeness

Abstract

This study examines the change of returns on common stocks around the time exchange-traded derivatives (options and futures) are listed on those stocks. It also analyses the impact of derivative introductions on market completeness. Two emergent markets are considered: India and Taiwan. We propose the use of event study based on GLS regression to test market completeness hypothesis. The evidence indicates that option and future introductions have a positive impact on the underlying stock returns. This effect is either transitory (Taiwan) or persistent until the 10th-day post listing (India). The market completeness hypothesis does not explain the price effect. We also find a significant increase in volume in the three days after the derivative introductions. Finally, the argument explaining the price reaction depends on the market and the way exchanges choose new underlying.

Keywords: derivatives listings, market completeness, price effect, GLS regression, event study, volume effect, traders' anticipations

JEL Classification: G14, G15