Single Stock Futures Research Articles

Single Stock Futures Trading and Stock Price Volatility: Empirical Analysis

This study examines impact of the introduction of single stock futures contracts on the return volatility of the SSFs-listed underlying stocks. The study documents a significant decrease in return volatility for the SSFs-underlying stocks following the introduction of single stock futures contracts on the Karachi Stock Exchange. The multivariate analysis in which the spot trading volume, the futures trading volume and open interest were partitioned into news and informationless components, the estimated coefficient of expected futures volume component is statistically significant and negatively related to volatility, suggesting that equity volatility is mitigated when the expected level of futures activity is high. The findings of the decreased spot price volatility of the SSFs-underlying stocks associated with large expected futures activity is important to the debate of regarding the role of equity derivatives trading in stock market volatility. These empirical results for the Pakistan’s equity market support theories implying that equity derivates trading improves liquidity provision and depth in the equity markets, and appear to be in contrast to the theories implying that equity derivates markets provide a medium for destabilising speculation. Finally, the SSFs-listed stocks were grouped with a sample of non-SSFs stocks to examine cross-sectional data for comparing changes in return volatility. After controlling for the effects of a number of determinants of volatility, sufficient evidence is found to support that, this multivariate test, like the previous analysis, provides no evidence that the volatility of the SSFsunderlying stocks is positively related to the introduction of the single stock futures trading in the Pakistan’s stock market.

Is cross-hedging an effective strategy in equity futures market?

This paper aims to evaluate whether the cross-hedging strategy with Nifty 50 and single stock futures is an effective tool to hedge the price risk of single stock investors. The risk reduction potential of different hedge portfolios derived from the optimal hedge ratios is evaluated using the Diagonal BEKK GARCH model. The results reveal that cross-hedging is an effective risk reduction strategy for investors exposed to specific securities devoid of futures. Investors can construct cross-hedging portfolios with futures having closely matching return profiles and hold these positions for a longer trade horizon to achieve higher risk reduction.

Determinants of the successful single stock futures market in Thailand

Thailand’s Single Stock Futures market has grown recently over the last ten years, evidenced by its 8th place in top 10 exchanges in the world by number of single stock futures traded in 2021. Since the main goal of any futures exchange is to list a successful contact, it is important to demonstrate the determinants of the success of Single Stock Futures. This study uses the sample consisting of 89 companies, on which stocks are underlying for Single Stock Futures in the period between January 2017 and December 2021, and finds that the best fitting method in modelling determinants of the success of Single Stock Futures is the fixed effects model. As expected, the results confirm the existence of a positive relationship between characteristics of underlying stock, including size, volatility, and liquidity, and the successful futures contract. Furthermore, the findings show the negative effects of the first year of contract trading and the tightened daily price limit of Single Stock Futures in response to the COVID-19 pandemic situation on contract success. AcknowledgmentThe author is grateful to the Department of Economics, Faculty of Economics, Kasetsart University for financial support to conduct this research.

Back to the futures: When short selling is banned

We examine the effect of single-stock futures (SSFs) trading on the price discovery and market quality of underlying stocks during the 2008 short-selling ban in the United States. We find a significant increase in SSFs trading volume for banned stocks during the ban period. We show that the contribution of SSFs trading to underlying stock price discovery also increased significantly. Moreover, SSFs trading helped mitigate the negative effect of the short-selling ban on market quality. Although SSFs trading in the U.S. still lags other countries, our findings project an increasingly important role for them in the U.S. financial market.

Are There Listing Effects of Single Stock Futures in the Derivatives Market on Firms’ Accounting Behavior? Evidence from Korea

Are There Listing Effects of Single Stock Futures in the Derivatives Market on Firms’ Accounting Behavior? Evidence from Korea

The Relationship between Single Stock Futures Contracts and Financial Ratios

Yatırımcıların kararlarını etkileyen en önemli faktörlerden birisi kuşkusuz yatırım yapacakları finansal enstrümandan elde edecekleri getirilerin maksimizasyonudur. Dolayısıyla yatırımcıların doğru karar verebilmesi için söz konusu yatırım araçlarının getirilerini etkileyen faktörlerin neler olduğunu bilmesi gerekmektedir. Bu çalışmanın amacı Borsa İstanbul Vadeli İşlem ve Opsiyon Piyasasında işlem gören EREGL, SAHOL, TCELL, THYAO, TUPRS pay vadeli işlem sözleşme getirileri ile seçilen farklı türdeki finansal oranlar arasındaki ilişkinin adımsal regresyon analizi yöntemiyle incelenmesidir. Çalışmada bu amaç doğrultusunda 2014Q1-2019Q4 dönemi analiz edilmiştir. Çalışmanın sonuçlarında EREGL, SAHOL, THYAO ve TUPRS pay vadeli işlem sözleşme getirilerinin piyasa değeri defter değeri oranından pozitif yönde; TCELL pay vadeli işlem sözleşme getirisinin ise piyasa değeri defter değeri oranından pozitif, kısa vadeli borç/aktifler oranından negatif yönde etkilendiği bulgulanmıştır.

Single stock futures and their impact on market quality: Be careful what you wish for

AbstractWe explore the relationship between efficiency and fairness around a natural experiment resulting in the delisting of equity‐linked single stock futures on the National Stock Exchange of India. We provide evidence that the presence of a derivative improves the liquidity of the underlying but decreases the degree of fairness—proxied by manipulation likelihood. Our study highlights that a leveraged derivative entices manipulation of the underlying and that typical inhibitors of manipulation, high execution costs, are conducive to successful market abuse.

Accelerators of Depth in Nascent Derivative Markets

The Kenyan derivatives market is at nascency which raises doubt on its depth in the short term and hence the urgency for intervention. This paper examines the factors that would accelerate the market depth 154 days after its inauguration. We quantify the effect of hypothesized accelerators of derivatives market depth using granger causality and Autoregressive Distributed Lags model for the first 30 weeks of trading. We examine the effect of size of the underlying cash market, volatility and liquidity of the underlying spot market on the market depth of single stock futures and equity index futures. We employ Granger Cointegration Test, Johansen Cointegration Test and Autoregressive Distributed Lag Model (ARDL) and Error Correction Model as statistical inferences methods. We then conduct a communicative validity of the results with 32 key informants who directly interact with the derivative market and use their qualitative responses to enrich our findings and recommendations. Empirical results show that the size of the underlying cash market, volatility and liquidity of the underlying spot market does not accelerate the derivatives market depth. We find that the answers to acceleration lie in introduction of derivative products whose underlying assets are widely traded such as currency and agricultural commodities in addition to undertaking more market literacy and awareness efforts.

Effect Open Interest on Implied Cost of Equity Capital of Firms Listed Single Stock Futures in the Derivatives Market

Effect Open Interest on Implied Cost of Equity Capital of Firms Listed Single Stock Futures in the Derivatives Market

Early Results on Depth of the Nascent Kenyan Derivative Market

Despite their importance in hedging against risk and reducing price uncertainty, derivative markets remain undeveloped or absent in many African countries. This paper describes market depth using key trends observed in the Kenyan derivatives market for the first 30 weeks of trading using mixed methods. Market depth was measured by the number of open interests of 142 trading days (30 weeks. The market was described using trend analysis, tests of means, and thematic analysis. The results revealed a market highly dominated by one company's single stock futures (Safaricom Plc), whose overall trade was 68% of the 6179 open contracts. Further, the market has strong weekly swings fluctuating from no trade to a high of 326 and a weekly average of 206 contracts. The market segment of single stock futures is significantly deeper than that of equity index futures. The qualitative study attributed the results to limited knowledge on derivatives amongst investors, unclear market policies, few derivatives products, and skepticism associated with developing financial markets. The Nairobi Securities Exchange (NSE) is advised to intensify investor education, introduce market makers, add new derivatives products, and transform the Nairobi Securities Exchange Clearing House into a full Central Counterparty (CCP) structure to accelerate market depth. This will create a pathway to market depth through efficiency and reduction of operational risks.

Spillovers of cum-ex and cum-cum trading with single stock futures

We examine single stock future (SSF) trading and respective underlyings around dividend ex-dates to study a specific form of dividend tax arbitrage, widely known as cum-ex and cum-cum trading, across Europe. Both strategies are designed to profit from illicit refunds of tax withheld from dividends, using SSF to share the realized gains between colluding parties. Our results document trading spillovers into more favorable tax regimes. High trading activity disappears in markets with enacted tax reforms. SSF have been considerably overpriced during the cum-ex period. All findings are robust to controls, such as volume, volatility and institutional ownership. Ex-day price drops are largely unaffected by changes in investors' tax heterogeneity.

주식선물가격을 활용한 내재 배당금 추정

주식선물가격을 활용한 내재 배당금 추정

Noise Trading and Single Stock Futures: Modifying Sentana & Wadhwani’s Model

Derivatives,and their influence on the dynamics of underlying stock markets,is an interesting topic of debate, which predates their introduction. The unresolved influence of derivatives on their underlying stock markets still intrigues many. In this regard, researchers/stake holders are still curious about the (de)stabilizing influence of derivatives on the overall market. In disposition of these observations, two contradicting hypothesis have been studied widely and have remained the focus of attention in several theoretical and empirical studies. These hypotheses are explained in several ways. Among many, one explanation refers to the destabilizing influence of derivatives,due to the enhanced involvement of noise traders, after the introduction of derivatives.This aspect remains the topic of discussion for this study. After the formal introduction of the SSFs (Single Stock Futures) in Pakistan, this topic became a cause of concern for the stakeholders of this market as well. Hence, this study attempts to tap into this aspect of the de(stabilization) debate,by proposing a modified version of the famous Sentana & Wadhwani (1982)model. In order to tap the potential shortcomings of the S&W model, this study contributes to the extant literature in several ways: 1) It adds the feature of trading volume in the model to analyze and study the potential movement of noise traders from spot to futures market,due to the ease of trading that the futures markets offer, 2) the new, modified model adds a lagged term for returns in order to tap the potential asynchronous inefficiencies, 3) it considers the Generalized Error Distribution (GED) instead of the Gaussian Distribution, in order to realize the fact that returns are not normally distributed. Generally speaking, the modified version of the model not only extends the original model in terms of its explanation, but also empirically tests this aspect in the Single Stock Futures (SSFs) market of Pakistan. This model tested whether SSFs promote,or inhibit the noise trading post-SSFs. After putting it to test, the newer model did not report any negative or positive impact of the introduction of SSFs on the underlying stocks. This may conclude that the proclaimed (de)stabilizing role of the SSFs,in the context of Pakistan,is not justified.

Single Stock Futures and Their Impact on Market Quality: Be Careful What You Wish For

The impact of derivatives is almost invariably measured by the liquidity outcomes on the underlying. We explore the relationship between efficiency, fairness and derivatives with respect to the underlying. We provide evidence that the presence of a derivative improves liquidity in the underlying but decreases the degree of fairness - proxied by manipulation likelihood. Our study highlights that a leveraged derivative entices manipulation in the underlying and that typical inhibitors to manipulation, namely high visible execution costs, are in fact desirable.

THE LEAD LAG RELATIONSHIP BETWEEN SPOT AND FUTURES MARKETS IN THE ENERGY SECTOR: EMPIRICAL EVIDENCE FROM INDIAN MARKETS

The study aims at finding the intraday Lead-Lag relationship between Spot and Futures Market for Energy Sectors Stocks on which Single Stock Futures (SSFs) is available, by applying 1-Minute Price Returns for the period ranging from 1st April 2017 to 31st March 2019. The study explores Price-Discovery between Stock Futures and their Underlying Stocks by applying Vector Error Correction Model, Hasbrouck (1995) Information Shares, and Common Factor Component Weights of Gonzalo and Granger (1995). The findings indicate that trades in the Futures Market contribute more to Price-Discovery than Spot Market.Keywords: Energy Sector, Single Stock Futures; Price-Discovery; Information share; VECM; CointegrationJEL Classifications: G11, G14DOI: https://doi.org/10.32479/ijeep.9783

Do the Single Stock Futures and the Underlying Stocks Lead-Lag? Empirical Evidence from Indian Markets

Do the Single Stock Futures and the Underlying Stocks Lead-Lag? Empirical Evidence from Indian Markets

Derivative trading and structural breaks in volatility in India: an ICSS approach

Researchers argue that ignoring the structural breaks in the time-series variance can cause significant upward biases in the degree of persistence in estimated GARCH models. Against this backdrop, the present study empirically examines the effect of stock futures on the underlying stock’s volatility in India by incorporating the structural breaks with the help of ICSS test and AR (1)-GARCH (1, 1) model for 30 most liquid and actively traded underlying stocks and their associated futures contracts. The study period ranges from the 1st January 2000 or the listing date of the particular stock (whichever is prior) till 31st March 2019. The study contributes to the on-going debate regarding the effect of derivatives on the underlying stock market’s volatility in two ways. Firstly, by taking into consideration the breaks in the volatility and, secondly, studying the effect of single stock futures will allow us to evaluate company-specific response to futures trading directly. The study offers a mixed outcome for the stocks under consideration. However, there is evidence of a decline in unconditional volatility for the majority of the stocks. The overall findings indicate that trading in stock futures may not have any detrimental effect on the underlying stock’s volatility.

Trading protocols and price discovery: Implicit transaction costs in Indian single stock futures

AbstractWe show how trading protocols impede the price discovery process in single stock futures as implicit trade costs outweigh explicit costs. Despite the trade volume dominance, trade costs advantage and leverage efficiency in futures markets, single stock futures account for only 35% of the price discovery vis‐á‐vis the spot market. Futures market's informational efficiency is adversely affected by market frictions in the form of marketwide position limits, minimum contract values, and margin requirements.

Efficiency of Indian Equity Futures Market—An Empirical Analysis with reference to National Stock Exchange

At National Stock Exchange (NSE), the largest by market capitalization and the most liquid stocks, which form the majority of free float market capitalization of the exchange, have traded futures contracts. The equity stock futures segment in India has recorded very high growth in trading volume and turnover for more than one decade where majority trade happens on NSE. The primary objective of this study is to investigate the dynamic linkages between equity stock futures and their underlying spot markets. The article examines market efficiency and the causal relationship between single-stock futures and underlying stocks traded at NSE, by employing Johansen cointegration test, a test for autoregressive (AR) order of basis, vector error correction model (VECM) and impulse response functions. The result shows the existence of long-run equilibrium relationship between equity stock futures and their underlying stocks. The spot market is found to play a lead role in correction of any short-run disequilibrium towards long-run equilibrium, for the majority of stocks. Both spot and future markets contribute in price discovery and neither of the markets display considerably higher information efficiency compared to the other. In contrast, the study also reveals possibilities of arbitrage opportunity between the equity stock futures market and the underlying spot market in absence of transaction costs possibly due to faster correction of short-run disequilibrium by spot prices.

When trading options is not the only option: The effects of single‐stock futures trading on options market quality

AbstractWe use the 2008 short‐selling ban to examine the impact of single‐stock futures (SSFs) trading on options market quality. We show that there is a substitution effect between options trading and SSFs trading during the ban period. In addition, our results show that SSFs trading had a significant effect in narrowing the bid‐ask spreads of options contracts. Moreover, compared to stocks without SSFs, stocks with SSFs were less likely to violate put‐call parity during the ban period. Our results suggest that SSFs trading helps mitigate the negative effect of the short‐selling ban on options market quality documented in the literature.