The effects of newly listed derivatives in a thin stock market

Abstract

Abstract. This study examines the informational feedback effects associated to the listing and trading of derivatives in Switzerland. The observed changes in the price and higher moments of stock returns are representative of a thin stock market. The listing of stock options and index futures generated positive abnormal returns for large stocks and for the index while small stocks essentially benefited from the launching of index options. While reducing the variance of blue chips and of the index, their variance's stochasticity increased (decreased) at index options' (futures) listings. Finally, we detect significant stock and index derivatives' price leads which do not however generate arbitrage opportunities.

Application of Simple Technical Trading Rules to Swiss Stock Prices: Is it Profitable?

“…Let us consider from this point of view the level of fees faced by Swiss investors. Bruand and Gibson-Asner (1998) estimate that trading costs are between 0.3% and 1.6% depending on the magnitude of the order and if the investor has direct access to the market or not. Clearly, 0.3% would be the fee charged to an important financial institution which has direct access to the market and 1.6% would be the fee charged to the individual investor.…”

Improving Portfolio Performance with Option Strategies: Evidence from Switzerland

“…Summary statistics for the ex post sample are not reported here as they are qualitatively very similar to those presented in Table 1. 5 These transaction costs are those charged to institutional investors and are in line with those used by Bruand and Gibson-Asner (1998) for the Swiss stock market and Adjaoute (1993) for the SOFFEX.…”

Do Newly Listed Derivatives Affect the Market Risk Premium in a Thin Stock Market?

“…However the structure of the dummy variables used in this 12 An in-depth theoretical treatment of these conditions extended to multivariate processes can be found in Engle and Kroner (1995). 13 The dummies respectively refer to: Bruand and Gibson (1998) on the significant effects of newly listed derivatives on the unconditional and conditional levels of the Index returns' variance, we only introduce dummy variables that capture level changes in the conditional variance process. study prevents us from capturing 'pure' time variations in the instrumental variables' coefficients, at least as far as short cycle time variations of these coefficients are concerned.…”

“…For instance, Edwards (1988a and1988b) reports a decline in the stock market volatility after the introduction of stock index futures in 1982. On the Swiss market, Bruand and Gibson (1998) study the informational feedback effects associated with the listing of standardized stock and stock index options. Their empirical results support the gradual completion hypothesis advocated by Detemple and Jorion (1990) in that the decrease of the variance of the blue chips stocks and of the Swiss Market Index (SMI) returns becomes less pronounced after subsequent launchings.…”

“…Hence, assuming a time-varying unitary risk premium specification coupled with a univariate GARCH (1,1)-in-mean model for the Swiss Bank Corporation General (SBC) Index excess returns, we analyze the individual and joint effects of the three stock and stock index derivatives listings which took place on the Swiss stock market between the 19th May 1988 and the 9th November 1990. We further rely on previous empirical results by Bruand and Gibson (1998) that acknowledged a significant reduction in the unconditional variance of the SBC General Index's (and of the Swiss Market Index, SMI) returns after the three derivatives listings and used a GARCH (1,1) specification to show that cumulatively, the three listings also significantly reduced the constant of the SMI (Swiss Market Index's) returns' conditional variance process.…”