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Effect of futures trading on the liquidity of underlying stocks: Evidence from Vietnam

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  • Pham, Son Duy
  • Nguyen, Thao Thac Thanh
  • Do, Hung Xuan

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.

Suggested Citation

  • Pham, Son Duy & Nguyen, Thao Thac Thanh & Do, Hung Xuan, 2022. "Effect of futures trading on the liquidity of underlying stocks: Evidence from Vietnam," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:pacfin:v:73:y:2022:i:c:s0927538x22000671
    DOI: 10.1016/j.pacfin.2022.101772
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    More about this item

    Keywords

    Liquidity; Future; Mispricing; PIN; Short-sale constraints;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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