Stock futures listing, market liquidity and stock behaviour: Evidence from India

Abstract

Liquidity measures an investor's ability to sell an asset quickly and at a reasonable price. The primary objective of the study is to quantify the effect of the launch of single stock futures (SSF) on the underlying liquidity by treating the Stock Futures listing date as an event. We analyse the effect of listing SSF on liquidity using data for the 210 days pre-listing and postlisting. The present study uses price-impact liquidity as well as volume and turnover. The findings revealed substantial evidence of a rise in the illiquidity ratio, implying that the liquidity of the majority of the sample stocks in the study has decreased. Similarly, the introduction of futures has resulted in a reduction in the trading volume of stocks. However, there is no evident impact on turnover. A possible explanation for the observed phenomenon could be the migration of traders from spot to futures markets. Due to the benefits of leverage and the lack of shortselling prohibitions, traders consider derivatives to be superior investments.