The Impact of H-Share Derivatives on the Underlying Equity Market

摘要

We investigate the impact of the sequential introduction of the Hang Seng Chinese Enterprise Stock Index (H-share Index) futures and options trading on the underlying Chinese equities listed in Hong Kong. Using both cross-sectional and time series analysis, we show that H-share index futures trading started in December, 2003 is associated with an increase in spot market volatility and volume; while the subsequent H-share index options trading started six months later leads to a significant decline in spot market volatility and volume. We conjecture that the availability of H-share index futures induces additional speculating activities in the underlying equities, leading to the increase in volatility and volume of the underlying stocks. However, the subsequent introduction of H-share index options allows speculative and arbitrage activities using futures directly against options, which are much cheaper and more efficient than using the underlying stocks. Such a shift of trading activities naturally leads to a decline in volatility and volume in the underlying equities. We also find that futures and options trading does not change the liquidity of H-share constituent stocks, although futures trading does widen the quoted spread of H-share non-constituent stocks due to changes in price and trading volume and to a fixed price component in the spread. Our results shed light to securities exchanges in determining the timing of introducing futures and options and the corresponding impacts to the cash market.