Effect of futures trading on the liquidity of underlying stocks: Evidence from Vietnam

Son Pham; Thao T.T. Nguyen; Hung X. Do

doi:10.1016/j.pacfin.2022.101772

Effect of futures trading on the liquidity of underlying stocks: Evidence from Vietnam

Son Pham, Thao T.T. Nguyen, Hung X. Do^* (Corresponding Author)

^*Corresponding author for this work

Accountancy & Finance, Finance

Research output: Contribution to journal › Article › peer-review

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.

Original language	English
Article number	101772
Number of pages	21
Journal	Pacific-Basin Finance Journal
Volume	73
Early online date	11 May 2022
DOIs	https://doi.org/10.1016/j.pacfin.2022.101772
Publication status	Published - Jun 2022

Keywords

Liquidity
Future
Mispricing
PIN
Short-sale constraints

Access to Document

10.1016/j.pacfin.2022.101772Licence: Unspecified

Cite this

@article{b723d48bdd20405a9daaff83ac9c2128,

title = "Effect of futures trading on the liquidity of underlying stocks: Evidence from Vietnam",

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.",

keywords = "Liquidity, Future, Mispricing, PIN, Short-sale constraints",

author = "Son Pham and Nguyen, {Thao T.T.} and Do, {Hung X.}",

year = "2022",

month = jun,

doi = "10.1016/j.pacfin.2022.101772",

language = "English",

volume = "73",

journal = "Pacific-Basin Finance Journal",

issn = "0927-538X",

publisher = "Elsevier",

}

TY - JOUR

T1 - Effect of futures trading on the liquidity of underlying stocks

T2 - Evidence from Vietnam

AU - Pham, Son

AU - Nguyen, Thao T.T.

AU - Do, Hung X.

PY - 2022/6

Y1 - 2022/6

N2 - 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.

AB - 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.

KW - Liquidity

KW - Future

KW - Mispricing

KW - PIN

KW - Short-sale constraints

U2 - 10.1016/j.pacfin.2022.101772

DO - 10.1016/j.pacfin.2022.101772

M3 - Article

SN - 0927-538X

VL - 73

JO - Pacific-Basin Finance Journal

JF - Pacific-Basin Finance Journal

M1 - 101772

ER -

Effect of futures trading on the liquidity of underlying stocks: Evidence from Vietnam

Abstract

Keywords

Access to Document

Fingerprint

Cite this