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Title: The Impact of Derivative Trading on the Liquidity of Stocks
Authors: M S Narasimham, Shalu Kalra
Issue/Year: Jul-2014
Section: Research
Abstract: This paper examines the impact of introduction of derivative trading on the price-impact measure of liquidity of underlying stocks in the cash market. The liquidity of stocks ii in the cash market declined in the short-run after the introduction of derivative trading. The long-term impact on liquidity is influenced by the liquidity of stocks prior to introduction of derivative trading. The introduction of derivative listing improved the liquidity of stocks with low pre-derivative liquidity. The post-derivative liquidity marginally declined for other stocks whose liquidity is high prior to derivative trading. The results highlight the importance of derivative trading to improve the liquidity of stocks which are otherwise illiquid.
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