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.
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