In the name of Almighty Allah who is most

merciful & most beneficent.

In the name of Muhammad (SAW) who is
the most noblest person in the world.

Presented To:

Muhammad Sajid
(Department of Banking and Finance GCUF)

Presented By:
Usman Rashid

Anam Anwar
Faiza Iram
Haris Ashraf

Muhammad Umair Siddiq

Bakhtawar Shuja

Topic of Article:
DOES EQUITY DERIVATIVES TRADING
AFFECT THE SYSTEMATIC RISK OF THE
UNDERLYING STOCKS IN AN EMERGING
MARKET.
(EVIDENCE FROM PAKISTANS FUTURES MARKET)

Abstract
This paper examines the behavior of beta co-efficient

for underlying stocks for SSFs (single-Stock Futures)

contracts in Pakistan markets.
The model that accounts for nonsynchronous, thin

trading and varying market conditions as bull and

bear market.

 U.S markets use post future listing period for bull

and bear markets.

In SSFs products there is a decrease in the

systematic risk and this indicates the change in

Beta.

Introduction
SSFs are firstly introduced in 1996 in Australian

market have since made them available to the

investors.
This papers examine relatively neglected aspect of
SSFs trading in the literature in Pakistan of the
relationship between SSFs contracts trading and the
behavior of the systematic risk of underlying stocks.

 It was introduced in Pakistan market earlier than

U.S market but it has been ignored in this context.

Two key exceptions are Khan (2006) and Khan and
Hijazi (2009).
They examine the relationship between SSFs
trading and the price volatility of the underlying
stocks.

 Most of the studies showed the relationship between

SSFs trading and price volatility dynamics but no

one has done work on relationship between SSFs
trading and the beta.
This article aims to trigger further research on this
topic.

 There are two advantages of SSFs contracts,

The effect of index futures of the underlying assets

may not be measured as accurately as the effect
dissipates across many constituent stocks.
2. Multiple introduction dates for SSFs mitigate the
limitation of single event study of index future and
help to evaluate their effect.
1.

 Our empirical results are summarized as follows,

We observed a significant decrease in beta, estimates

in SSFs post future trading periods.

The results thus failed to reject the hypothesis that
SSFs trading might not have an import on the
systematic risk either on short or long run.

Literature Review
Any working or any news paper article on any topic

is known literature review.

In literature review I discuss two points,
Theoretical background
Empirical evidence

1. Theoretical Background
No specific theories or models have been presented

to explain the relationship between the beta and

SSFs contract.
There are two hypothesis that put forward as a
possible explanation for the relationship between
beta and SSFs trading theses are,

Price pressure hypotheses

Cascade theory

Price Pressure Hypotheses

The first is the price pressure hypotheses by

Shleifer (1986)
Harris and Gurel ((1986
In this hypothesis they made conclusion of a stock in

an index and after this there was a temporary rise

(fall) in demand for the stock over a short period
when they put this stock into an index arbitrage and
program trading activities, the stock price is higher
than index value.

Cascade Theory
The 2nd hypothesis is the cascade theory, it explain

the effect of program trading on stock return.

They sell index future rather than underlying basket
of stocks to hedge against market risk leading to a
decrease in the future price relative to the spot price
of the index.

2. Empirical Evidence
It is the source of knowledge acquired by means of

observation or experimentation,
Skinner(1989)

Says that the return volatility decrease while beta is unaffected.

Conrad (1989)
Gave same result as Skinner.

 Senchack (1989)
Used MMI (major market index) by employing event, study,
methodology and report, and increase in systematic risk for 20
MMI stocks.
Martin and Senhack (1991)
Used daily MMI, the result indicates the average increase
percentage systematic risk for 20 MMI.

 Miller (1997)
The study reports a significant decrease in beta estimates for
sample of medium and large capitalization stocks, while no
such change is found for the component stocks.
Kan and Tang (1999)
Applied a varying a risk market model on Hong Kong stock
exchange and they found no increase in systematic risk.

 EPPs (1979), Dimson (1979) and Hayashi and

Yoshida (2005)

Beta estimates can be biased because of nonsynchronous

trading and market fictions.

The SSFs Market In Pakistan

SSFs were introduced on the Karachi Stock

(KSE)Exchange on 1st July 2001.

Initially, nine stocks were selected for SSFs contract.
The overall 46 contracts which were increased by
February 2008 provide the market coverage to each
of the major sectors of the Pakistan's economy.

These sectors are:

Commercial banks (17 SSFs)
Textiles (one SSFs)
Cement (five SSFs)
Power generation and distribution (three SSFs)
Oil and gas marketing (three SSFs)
Oil and gas exploration (three SSFs)
Synthetics and rayon (two SSFs)
Transport (one SSFs)
Technology and communication (two SSFs)
Refineries (four SSFs)
Insurance (one SSFs)
Fertilizer (three SSFs)

How the trading in SSFs take place?

Trading in SSFs take place through computerized

Karachi automated trading system and is displayed

on KSE market information system.
These contracts are available on a
one- calendar-month expiry cycle.
There is no separate, independent futures exchange
for SSFs trading in Pakistan.
These contracts are settled through the physical
delivery of shares on the expiration of the contract

 There is no option of cash settlement.

Final holder of the future contract has to take

delivery of the underlying stock.

There is no overlapping period for contract.
The Annex summarizes the salient contract
specifications of SSFs contracts traded on the KSE.

Varying-Risk Market, Model for Evaluation of

Risk Estimates:
Rowe and Kim (2010), Yip and Lai (2009) and

Frimpong (2010); have used market model approach

which assumed a constant beta.
Ulosoy (2008), Rowe and Kim (2010), Patton and
Verado; there studies shows that systematic risk
varies over time with different variables describing
the financial structure.

 Fabozzi and Francis (1977-79), Jagannathan and

Waing (1996); some studies have documented

changes in beta estimates for individuals stocks and
bull and bear market.
Howten and Erson (1998); the relationship between
beta and stocks return that changes in bull and bear
market after controlling or other determents. Their
findings highlights the varying risk model.

 Damodaren (1990); implies daily return data to

compare beta changed for S&P 500 constituent

stocks and non-index firms and finds average higher
beta S&P 500 stocks in the post future periods
compared to non-index stock which results in change
in beta (Dividend yields, D/E ratios, book values of
assets and cash to total assets.)
The author concludes that this increase in beta could
be related to trading activity variables, which show
much more trading and noise subsequent index
future trading.

 By following Kan and Tang:

we adopt following varying risk market model to

examine SSFs trading and systematic risk effects.
Ri,t=1+2D1+3D2+4D1D2+0Rm,t+1D1Rm,t+2D2Rm,t+3D1
D2Rm,t+i,t
Ri,t are the weakly return on stock i for weak and t for

index 100. Rm,t are return on the KSE 100 index D1

and D2 dummy variables where D1=1 in the post SSFs
periods and zero in pre SSFs periods. While D2=1 in a
bear month and zero in bull month.

 In equation (1) when D1=1, the beta coefficient is

0+ 1+ 2D2+ 3D2; when D1=0, it is 0+ 2D2. Therefore,

the change in the beta coefficient for a particular stock in

the pre-SSFs and post-SSFs period is 1+ 3D2.
The statistical significance of 1+ 3D2 indicates whether
the beta of a stock has changed after SSFs trading has
been introduced.
If the 3 coefficient turns out to be statistically
insignificant, 1 may be used to measure changes in the
stocks beta in the post-futures period.

Data description and Empirical Results: Varying

risk market model
The data is used consist of weekly closing prices of

SSFs-listed stock and a sample of non SSFs-stock a

ten year period from 1 July 1991 to 31Dec 2009.
For each SSFs contracts, consider two years data for
the pre SSFs period and two year data for the post
SSFs period.
The weekly price data is taken as the closing price on
Wednesday
We took 46 SSFs stock listed on KSE as our sample.

 Each stock is divided into two sub periods:

Pre SSFs period

II. Post SSFs period
And each sub period consist of two year data.
To determine whether the changes in beta of SSFS
stock due to future contracts or whether are the
result of general market or industry.
In this study some control sample of Non- SSFs
stock also include.
I.

 Non-SSFs stocks are elected from major stock results

of economy.88 stocks are included in control group

which represent the 80% market capitalization.
We use KSE100 index to proxy for market return.
Changes in beta effect at micro level in prices.
We examine short and long term window interval.
We applied eq. (1) separately on listed and non-listed
SSFs over three different intervals,
a) Six Months
b) 1 Year c) 2 Years
To determine the SSFs trading effects.

Table : Percentage of stocks with beta changes for SSFs-listed and

non-SSFs stocks (post- and pre-futures periods for different sampling
periods)

SSFs-listed stocks 6 months time 1 years time 2 years

time
Increases in beta 9 (19.57%) 9 (19.57%) 5 (10.86%)
Decreases in beta 11 (23.89%) 18 (39.30%) 25 (54.38%)
No changes in beta 26 (69.23%) 19 (41.13%) 16 (34.78%)
Total 46 (100%) 46 (100%) 46 (100%)
Non-SSFs stocks 6 months time 1 years time 2 years time
Increases 5 (5.6%) 18 (20.45%) 13 (14.778%)
z-statistic [0.681] [-0.0652] [-0.7993]
Decreases 9 (10.22%) 26 (29.54%) 37 (42.04%)
z-statistic [1.1599] [0.597] [-0.0774]
No changes 74 (84.10%) 44 (50%) 38 (43.18%)
Test statistic
z-statistic [-1.243] [-0.5741] [-0.5704]
Total 46 (100%) 46 (100%) 46 (100%)

Conclusion
Systematic risk of underlying stocks post SSFs

listings in Pakistans market by employing a model

that accounts for nonsynchronous trading and
varying market conditions such as bull and bear
market.
The reduction in beta results in market wide
movements.