The Liquidity Impact of the Introduction of Derivatives Contracts on the Underlying Stock Market: Evidence from the Vietnam Stock Market

This study investigates the liquidity impact of introducing derivatives trading in Vietnam, with VN30-index futures being the first derivatives instrument. Our data covers most of the VN30-index constituent stocks at the time of the introduction and some non-VN30-index companies that have medium market capitalisation listed on the Ho Chi Minh City stock exchange over the period 2016-2018.

Employing two methods for panel data analysis to examine both the short-term and long-term liquidity impact of the introduction, we find significant increases in trading volume and turnover volume of the underlying stock market in the short term. However, after the official launch of VN30-index futures, there was a temporary decrease in the trading volume of the stock market. Regarding the long-term liquidity impact, our results indicate that the turnover volume of VN30-index stocks has increased significantly following the introduction of VN30-index futures. We also find weak evidence of improvements in the trading volume of VN30-index constituent stocks. In addition, Martin’s liquidity measure’s results suggest that there were significant decreases in the liquidity of 40.74% VN30-index stocks. In general, we conclude that the introduction of the index futures contract has a positive impact on the underlying stock market liquidity.