The impact and performance of new equity derivatives : evidence from universal stock futures
Over the last few decades, a large number of new equity derivatives have emerged in
the international financial system. Examples of these innovations include equity
options, stock index futures, and more recently, futures on individual stocks.
Whether the creation of these new derivative instruments has social or economic
value is of central concern for both policy-makers and scholars. Advocates argue that
the new derivative instruments make markets more complete, enhance information
dissemination, and allow a more optimal allocation of risk in the economy. However,
there are many who argue that derivatives have a negative impact on financial
markets, by allowing more investors to take highly leveraged speculative positions.
A considerable amount of research has been directed towards examining the impact
and performance of different commodity and financial derivatives markets. However,
as a recent entrant to the global derivatives market, the evidence on Universal Stock
Futures (USFs) market is very limited. This thesis, therefore, aims to provide new
evidence in the literature by examining the role and functioning of USF contracts.
Given their unique characteristics, the investigation of USFs provides more reliable
and wider ranging insights into the economic benefits and costs of futures market.
The empirical results can be summarised as follows. First, the introduction of USFs
has not had a detrimental effect on the underlying markets. On the contrary, the
influence appears to have been positive leading to a small reduction in noise trading
and improved efficiency. Second, USFs perform the price discovery function
efficiently since futures prices contribute to the discovery of new information.
Furthermore, many USF contracts influence the volatility of the relevant stock, and
therefore, further support the notion of price discovery. Third, the market also seems
to perform its risk management function satisfactorily, although some contracts fail
to reduce the price risk to the extent evidenced in other markets in the literature.
Finally, sub-period/sub-sample analysis indicates that the effectiveness of USF
contract as a centre for price discovery and risk management has strengthened over
the years; and are influenced by market-specific factors (liquidity and trading costs),
futures characteristics like contract size, and geographical origin of underlying stock.
The overall finding of this thesis is that USF markets are well-functioning and do not
undermine the existing markets. These results should provide useful reference for
other emerging markets which have introduced and/or been considering to launch
single stock futures to their markets.