IDEAS home Printed from https://ideas.repec.org/a/wly/jfutmk/v38y2018i11p1313-1333.html
   My bibliography  Save this article

Equity index futures trading and stock price crash risk: Evidence from Chinese markets

Author

Listed:
  • Jinyu Liu
  • Rui Zhong

Abstract

Equity index futures are often blamed for exacerbating equity price crash risk although there is little empirical evidence to support the accusation in the literature. We find that Chinese equity index futures trading significantly reduces stock price crash risk. This negative relationship is strengthened by institutional ownership and weakened by a controlling shareholders’ incentive to elude external monitoring, such as the divergence of control and cash‐flow rights of dominant shareholders, the block holdings of the largest shareholders, and state ownership. Our findings reveal the positive externality of financial derivative innovation on equity market stability.

Suggested Citation

  • Jinyu Liu & Rui Zhong, 2018. "Equity index futures trading and stock price crash risk: Evidence from Chinese markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(11), pages 1313-1333, November.
    • Handle: RePEc:wly:jfutmk:v:38:y:2018:i:11:p:1313-1333
    DOI: 10.1002/fut.21933
    as

    Download full text from publisher

    File URL: https://doi.org/10.1002/fut.21933
    Download Restriction: no
    File URL: https://libkey.io/10.1002/fut.21933?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    2. Jian Yang & Zihui Yang & Yinggang Zhou, 2012. "Intraday price discovery and volatility transmission in stock index and stock index futures markets: Evidence from China," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 32(2), pages 99-121, February.
    3. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
    4. Grossman, Sanford J & Miller, Merton H, 1988. " Liquidity and Market Structure," Journal of Finance, American Finance Association, vol. 43(3), pages 617-637, July.
    5. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2001. "Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices," Journal of Financial Economics, Elsevier, vol. 61(3), pages 345-381, September.
    6. Bhargava, Rahul & Faircloth, Sheri & Zeng, Hongchao, 2017. "Takeover protection and stock price crash risk: Evidence from state antitakeover laws," Journal of Business Research, Elsevier, vol. 70(C), pages 177-184.
    7. Ray Ball, 2009. "Market and Political/Regulatory Perspectives on the Recent Accounting Scandals," Journal of Accounting Research, Wiley Blackwell, vol. 47(2), pages 277-323, May.
    8. Sang Bin Lee & Ki Yool Ohk, 1992. "Stock index futures listing and structural change in time‐varying volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(5), pages 493-509, October.
    9. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "Corporate tax avoidance and stock price crash risk: Firm-level analysis," Journal of Financial Economics, Elsevier, vol. 100(3), pages 639-662, June.
    10. Yang Hou & Steven Li, 2013. "Price Discovery in Chinese Stock Index Futures Market: New Evidence Based on Intraday Data," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(1), pages 49-70, March.
    11. Stijn Claessens & Simeon Djankov & Joseph P. H. Fan & Larry H. P. Lang, 2002. "Disentangling the Incentive and Entrenchment Effects of Large Shareholdings," Journal of Finance, American Finance Association, vol. 57(6), pages 2741-2771, December.
    12. Hutton, Amy P. & Marcus, Alan J. & Tehranian, Hassan, 2009. "Opaque financial reports, R2, and crash risk," Journal of Financial Economics, Elsevier, vol. 94(1), pages 67-86, October.
    13. Panayiotis C. Andreou & Christodoulos Louca & Andreas P. Petrou, 2017. "CEO Age and Stock Price Crash Risk," Review of Finance, European Finance Association, vol. 21(3), pages 1287-1325.
    14. Kim, Yongtae & Li, Haidan & Li, Siqi, 2014. "Corporate social responsibility and stock price crash risk," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 1-13.
    15. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    16. Avraham Kamara & Thomas W. Miller Jr. & Andrew F. Siegel, 1992. "The effect of futures trading on the stability of standard and poor 500 returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(6), pages 645-658, December.
    17. S. P. Kothari & Susan Shu & Peter D. Wysocki, 2009. "Do Managers Withhold Bad News?," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 241-276, March.
    18. Michael D. McKenzie & Timothy J. Brailsford & Robert W. Faff, 2001. "New insights into the impact of the introduction of futures trading on stock price volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(3), pages 237-255, March.
    19. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112.
    20. Chang, Xin & Chen, Yangyang & Zolotoy, Leon, 2017. "Stock Liquidity and Stock Price Crash Risk," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(4), pages 1605-1637, August.
    21. Shiqing Xie & Taiping Mo, 2014. "Index Futures Trading and Stock Market Volatility in China: A Difference‐in‐Difference Approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 34(3), pages 282-297, March.
    22. Thomas R. Kubick & G. Brandon Lockhart, 2016. "Proximity to the SEC and Stock Price Crash Risk," Financial Management, Financial Management Association International, vol. 45(2), pages 341-367, May.
    23. Sung C. Bae & Taek Ho Kwon & Jong Won Park, 2004. "Futures trading, spot market volatility, and market efficiency: The case of the Korean index futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(12), pages 1195-1228, December.
    24. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "CFOs versus CEOs: Equity incentives and crashes," Journal of Financial Economics, Elsevier, vol. 101(3), pages 713-730, September.
    25. repec:wyi:journl:002169 is not listed on IDEAS
    26. Cox, Charles C, 1976. "Futures Trading and Market Information," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1215-1237, December.
    27. Sean Becketti & Dan J. Roberts, 1990. "Will increased regulation of stock index futures reduce stock market volatility?," Economic Review, Federal Reserve Bank of Kansas City, vol. 75(Nov), pages 33-46.
    28. Cao, Chunfang & Xia, Changyuan & Chan, Kam C., 2016. "Social trust and stock price crash risk: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 46(C), pages 148-165.
    29. Bessembinder, Hendrik & Seguin, Paul J, 1992. "Futures-Trading Activity and Stock Price Volatility," Journal of Finance, American Finance Association, vol. 47(5), pages 2015-2034, December.
    30. Ali F. Darrat & Shafiqur Rahman, 1995. "Has futures trading activity caused stock price volatility?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(5), pages 537-557, August.
    31. Hong Chol & Avanidhar Subrahmanyam, 1994. "Using intraday data to test for effects of index futures on the underlying stock markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 14(3), pages 293-322, May.
    32. Callen, Jeffrey L. & Fang, Xiaohua, 2013. "Institutional investor stability and crash risk: Monitoring versus short-termism?," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3047-3063.
    33. Jeong†Bon Kim & Zheng Wang & Liandong Zhang, 2016. "CEO Overconfidence and Stock Price Crash Risk," Contemporary Accounting Research, John Wiley & Sons, vol. 33(4), pages 1720-1749, December.
    34. Lin, Chen & Ma, Yue & Malatesta, Paul & Xuan, Yuhai, 2013. "Corporate ownership structure and the choice between bank debt and public debt," Journal of Financial Economics, Elsevier, vol. 109(2), pages 517-534.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Krishnamurti, Chandrasekhar & Chowdhury, Hasibul & Han, Hien Duc, 2021. "CEO centrality and stock price crash risk," Journal of Behavioral and Experimental Finance, Elsevier, vol. 31(C).
    2. Kim, Jeong-Bon & Liao, Shushu & Liu, Yangke, 2021. "Married CEOs and Stock Price Crash Risk," QBS Working Paper Series 2021/09, Queen's University Belfast, Queen's Business School.
    3. Meng, Yongqiang & Shen, Dehua & Xiong, Xiong, 2023. "When stock price crash risk meets fundamentals," Research in International Business and Finance, Elsevier, vol. 65(C).
    4. Hu, Jinshuai & Li, Siqi & Taboada, Alvaro G. & Zhang, Feida, 2020. "Corporate board reforms around the world and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 62(C).
    5. Zaman, Rashid & Atawnah, Nader & Haseeb, Muhammad & Nadeem, Muhammad & Irfan, Saadia, 2021. "Does corporate eco-innovation affect stock price crash risk?," The British Accounting Review, Elsevier, vol. 53(5).
    6. Sun, Lingxia, 2023. "Ultimate government control and stock price crash risk: Evidence from China," Emerging Markets Review, Elsevier, vol. 55(C).
    7. Al Mamun, Md & Balachandran, Balasingham & Duong, Huu Nhan, 2020. "Powerful CEOs and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 62(C).
    8. Harper, Joel & Johnson, Grace & Sun, Li, 2020. "Stock price crash risk and CEO power: Firm-level analysis," Research in International Business and Finance, Elsevier, vol. 51(C).
    9. Xu, Lin & Rao, Yulei & Cheng, Yingmei & Wang, Jianxin, 2020. "Internal coalition and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 64(C).
    10. Leilei Gu & Jinyu Liu & Yuchao Peng, 2022. "Locality Stereotype, CEO Trustworthiness and Stock Price Crash Risk: Evidence from China," Journal of Business Ethics, Springer, vol. 175(4), pages 773-797, February.
    11. Jebran, Khalil & Chen, Shihua & Zhang, Ruibin, 2020. "Board diversity and stock price crash risk," Research in International Business and Finance, Elsevier, vol. 51(C).
    12. Ge-zhi Wu & Da-ming You, 2021. ""Stabilizer" or "catalyst"? How green technology innovation affects the risk of stock price crashes: an analysis based on the quantity and quality of patents," Papers 2106.16177, arXiv.org, revised Aug 2021.
    13. Long, Wenbin & Tian, Gary Gang & Hu, Jun & Yao, Daifei (Troy), 2020. "Bearing an imprint: CEOs' early-life experience of the Great Chinese Famine and stock price crash risk," International Review of Financial Analysis, Elsevier, vol. 70(C).
    14. Hu, Gang & Liu, Yiye & Wang, Jacqueline Wenjie & Zhou, Gaoguang & Zhu, Xindong, 2022. "Insider ownership and stock price crash risk around the globe," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    15. Min Jung Kang & Y. Han (Andy) Kim & Qunfeng Liao, 2020. "Do bankers on the board reduce crash risk?," European Financial Management, European Financial Management Association, vol. 26(3), pages 684-723, June.
    16. Bhargava, Rahul & Faircloth, Sheri & Zeng, Hongchao, 2017. "Takeover protection and stock price crash risk: Evidence from state antitakeover laws," Journal of Business Research, Elsevier, vol. 70(C), pages 177-184.
    17. Jebran, Khalil & Chen, Shihua & Ye, Yan & Wang, Chengqi, 2019. "Confucianism and stock price crash risk: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    18. Wen, Fenghua & Xu, Longhao & Ouyang, Guangda & Kou, Gang, 2019. "Retail investor attention and stock price crash risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 65(C).
    19. Ge, Yongbo & Zhu, Yuexiao, 2022. "Boosting green recovery: Green credit policy in heavily polluted industries and stock price crash risk," Resources Policy, Elsevier, vol. 79(C).
    20. Xing, Jieli & Zhang, Yongjie & Xiong, Xiong, 2023. "Social capital, independent director connectedness, and stock price crash risk," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 786-804.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:jfutmk:v:38:y:2018:i:11:p:1313-1333. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.interscience.wiley.com/jpages/0270-7314/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.