Impact of using derivatives on stock market liquidity
Neeru Chaudhry and
Aastha Gupta
Journal of International Financial Markets, Institutions and Money, 2024, vol. 97, issue C
Abstract:
This study demonstrates that using derivatives can significantly improve stock liquidity. We conduct several tests to check for robustness of our findings and control for potential endogeneity in our results. We observe that the decrease in stock illiquidity due to derivative usage is more pronounced for firms with high information asymmetry, high firm-specific risk, and negative investor sentiment. Ownership stakes held by foreign institutional investors and domestic promoters do not influence how derivative usage affects stock liquidity. This relationship is significant in the presence of large and independent boards. Our results emphasize the liquidity creation role of derivative usage, which complements other functions of derivatives markets, such as price discovery and risk management. Our findings are relevant for companies operating in foreign capital markets and for international investors who include Indian stocks into their portfolios.
Keywords: Stock liquidity; Derivatives; Information asymmetry; Agency problems; Firm riskiness; Investor sentiments; Emerging economy; India (search for similar items in EconPapers)
JEL-codes: G12 G30 H26 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:97:y:2024:i:c:s1042443124001434
DOI: 10.1016/j.intfin.2024.102077
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