The impact of derivative warrant introduction : evidence from stock exchange of Thailand

Abstract

The impact that derivative instrument has on the underlying stocks is important for regulators and investors to concern. This paper tries to examine the impact of derivative warrant introduction on liquidity (measured by trading volume) and risk (measure by volatility and systematic risk beta) of the underlying stocks in stock exchange of Thailand. This paper examines the impact on trading volume by using t-test for testing the equality of two means between pre-derivative warrant introduction period and post-derivative warrant introduction period and using dummy variable regression for finding a change in the underlying’s trading volume after the introduction of derivative warrant. For the impact on the underlying’s risk, this paper uses f-test to determine the equality of two variance by using the ratio of variance between pre-derivative warrant introduction period and post-derivative warrant introduction period and also uses GARCH (1,1) model with dummy variable to find a change in volatility of the underlying stocks after derivative warrant introduction, the dummy variable is also applied to investigate a change in the underlying’s beta after derivative warrant introduction.

Overall, the results from the impact after derivative warrant introduction, reduction in liquidity, reduction in volatility and no change in systematic risk beta, could provide additional information for regulators to improve market efficiency and for investors to enhance their trading strategy.