Abstract:
This paper examines the behavior of beta coefficients (systematic risk) for
underlying stocks around the introduction of single-stock futures (SSFs) contracts
in the Pakistani market, by employing models that account for nonsynchronous
and thin trading and varying market conditions as “bull” and “bear” markets.
Unlike the results of earlier studies on US markets, the empirical evidence tends to
support a decline in systematic risk for the majority of underlying stocks in the
post-futures listings period. Nevertheless, similar to SSFs stocks, we also find
empirical evidence of a decrease in systematic risk for many of the control group
stocks. This indicates that changes in beta estimates for SSFs-listed stocks might
not be induced by the introduction of SSFs contract trading, but could be
attributed to other market-wide or industry changes that have affected the overall
market. Several plausible reasons, such as lack of program trading activities
normally associated with index futures, market microstructure differences between
developed markets and a developing market such as Pakistan, and the capturing of
the “bear” and “bull” market effects on stock betas in our estimation procedure
could explain these different results for Pakistan’s market.
