Assessing the Impact of Equity Derivatives Introduction in National Stock Exchange (NSE), India

This article investigates the impact of introduction of equity derivatives in NSE, India, on price and liquidity characteristics of the underlying. First, the effect on price is examined following an event study methodology provided by Brown and Warner (1985), where the significance of the abnormal returns around the event day is examined. Next, the effect of these introductions on liquidity of the underlying is examined by determining the change in the mean levels of liquidity proxies. Five different liquidity proxies have been used for this purpose namely Relative Trading volume, Net Turn-over, Liquidity ratio, Price range and Trading frequency. These liquidity proxies are faced with the problem of serial-correlation. Therefore, the means are computed after fitting standard time-series ARMA (p,q) models. Further, Indian markets are also prone to “expiration day effect”. This effect is caused when all the existing options and futures contracts are simultaneously executed on the expiration day, where a large number of trading activity is observed. We control for this effect and the change in liquidity is once again assessed. The result on price effect shows significant positive abnormal returns on few days around the event. While, the result on liquidity indicate a general improvement in the level of liquidity post introduction and this is persistent even after controlling for the expiration day effect