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This study looks at the impact of derivatives listings
on returns of the underlying assets. Employing event study
methodology, the study finds significant and positive abnormal
returns around futures and options listing announcement
dates in the National Stock Exchange (NSE). The results
show that market capitalization of stocks on an average
increased for each stock in the sample from day 0 to day
10. The evidence obtained from the study support the `market
completion hypothesis' which is valid in the context of
the US, the UK and other developed countries.
The effect of derivative introduction on the underlying
securities has been widely studied in financial literature.
The problem with the option listing literature emanates
from the theory which posits all possible outcomes due to
option listing. According to Black and Scholes (1973), options
listing should have no effect on stock returns, whereas
positive price effect according to Hakansson (1982), Detemple
(1990) and Detemple and Selden (1991), and negative price
effect according to Miller (1977) and Danielsen and Sorescu
(2001). As theory provides no indication of the direction
or magnitude of option listing effects, empirical research
has gained momentum in this area. The theoretical ambiguity
of option listing effects also demanded extensive empirical
research. Empirical evidence in the US are mixed, positive
price effects until 1981 and negative afterwards. Studies
from Europe and other developed countries have tilted more
towards positive price effects except in case of the Netherlands
where Kabir (2000) reports negative price effects on stock
returns. The initial literature focused on options listing
as individual stock options were introduced first in the
developed markets and individual stock futures were introduced
much later after the options on stocks were introduced.
However, in India both options and futures were introduced
relatively at the same time. This enables to study the impact
of both options and futures on underlying prices and volume.
Studies in this area have been limited to the US, the UK
and other developed markets. There is no study available
in the literature in the Indian context. This motivates
us to study option and stock futures listing effects on
stock returns in a growing and emerging market like India,
where derivatives is a recent phenomenon but has grown phenomenally
in the last couple of years. To the best of our knowledge,
no study exists on Indian markets that looks at the impact
of derivatives on prices, volume and bid-ask spreads. Moreover,
it would be interesting to find out what effect derivatives
listing would have on stock returns and volume in India,
an open electronic limit order book market where options
and futures are listed simultaneously.
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