An empirical analysis of the impact of stock index futures trading on securities dealers' inventory risk in the NASDAQ market

Salil K. Sarkar and Niranjan Tripathy

Review of Financial Economics, 2002, vol. 11, issue 1, 1-17

Abstract: Stock index futures contracts (SIFCs) were developed in part to allow equity investors to conveniently hedge portfolio risks. Therefore, we may expect to observe smaller bid/ask spreads among NASDAQ equities following the introduction of trading in SIFCs. The potential transactions cost reduction results from the enhanced ability of dealers to hedge their inventory risk. Accordingly, we analyze the daily returns and bid/ask spreads of all CRSP‐listed NASDAQ stocks for a 10‐year period surrounding the introduction of three SIFCs in order to determine whether the introduction of these contracts has affected transactions costs in the NASDAQ equity market. Our results indicate that bid/ask spreads narrowed significantly following the introduction of stock index futures trading. Moreover, the behavior of the spreads leads us to the conclusion that risk reduction through cost‐effective hedging via stock index futures trading may have been the cause.

Date: 2002
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https://doi.org/10.1016/S1058-3300(01)00036-2

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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:11:y:2002:i:1:p:1-17

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