Do Derivatives Matter?: Evidence From A Policy Experiment

Agrawal, D and Subramanyam, K R and Tantri, P and Thirumalai, R S (2015) Do Derivatives Matter?: Evidence From A Policy Experiment. Working Paper. Indian School of Business, Hyderabad.

[img]
Preview
(Download)
| Preview

Abstract

We study the impact of derivatives on various stock characteristics such as valuation, price efficiency, and liquidity. We resolve the endogeneity issue faced in the extant literature by using an order issued by the Indian market regulator that resulted in the delisting of 51 stocks from the derivative segment. Using this policy experiment, we examine the conflicting hypothesis regarding the impact of derivatives on stock fundamentals. We find that excluded firms underperform the market by 4.07% during the event window. We identify a decline in price efficiency and reduction in liquidity as channels through which the above phenomenon manifests. Contrary to the expectations of the regulators, volatility remains largely unchanged. We rule out regulatory targeting by employing several placebo and robustness tests. We conclude that derivatives indeed add value by improving price efficiency and liquidity of a stock.

Affiliation: Indian School of Business
ISB Creators:
ISB CreatorsORCiD
Agrawal, DUNSPECIFIED
Tantri, PUNSPECIFIED
Thirumalai, R Shttp://orcid.org/0000-0001-9251-6829
Item Type: Monograph (Working Paper)
Uncontrolled Keywords: Derivatives, Policy Experiment
Subjects: Business and Management
Policy
Depositing User: Veeramani R
Date Deposited: 05 Jan 2016 09:14
Last Modified: 05 Jan 2016 09:14
URI: http://eprints.exchange.isb.edu/id/eprint/468
Publisher URL: http://ifrogs.org/PDF/CONF_2015/Agrawal_Subramanya...
Related URLs:

Actions (login required)

View Item View Item
Statistics for DESI ePrint 468 Statistics for this ePrint Item