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Does Equity Derivatives Trading Affect the Systematic Risk of the Underlying Stocks in an Emerging Market: Evidence from Pakistan’s Futures Market

  • Safi Ullah Khan

    ()

    (Institute of Management Sciences Kohat University of Science and Technology, Khyber Pakhtunkhwa, Pakistan.)

  • Zaheer Abbas

    ()

    (Faculty of Management Sciences, International Islamic University, Islamabad, Pakistan.)

Registered author(s):

    This paper examines the behavior of beta coefficients (systematic risk) for underlying stocks around the introduction of single-stock futures (SSFs) contracts in the Pakistani market, by employing models that account for nonsynchronous and thin trading and varying market conditions as “bull” and “bear” markets. Unlike the results of earlier studies on US markets, the empirical evidence tends to support a decline in systematic risk for the majority of underlying stocks in the post-futures listings period. Nevertheless, similar to SSFs stocks, we also find empirical evidence of a decrease in systematic risk for many of the control group stocks. This indicates that changes in beta estimates for SSFs-listed stocks might not be induced by the introduction of SSFs contract trading, but could be attributed to other market-wide or industry changes that have affected the overall market. Several plausible reasons, such as lack of program trading activities normally associated with index futures, market microstructure differences between developed markets and a developing market such as Pakistan, and the capturing of the “bear” and “bull” market effects on stock betas in our estimation procedure could explain these different results for Pakistan’s market.

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    File URL: http://121.52.153.179/JOURNAL/LJE%20Vol%2018-1/03%20Khan%20and%20Abbas%20.pdf
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    Article provided by Department of Economics, The Lahore School of Economics in its journal Lahore Journal of Economics.

    Volume (Year): 18 (2013)
    Issue (Month): 1 (Jan-June)
    Pages: 63-80

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    Handle: RePEc:lje:journl:v:18:y:2013:i:1:p:63-80
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    1. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
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