The effect of derivative trading on the underlying markets: Evidence from Canadian instalment receipts trading [An article from: International Review of Economics and Finance]

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Description:
We examine the impact of instalment receipts (IRs) trading on the underlying stocks' volatility. IRs are a derivative security that evidences the purchase of an underlying security on an instalment basis. IRs have been commonly used to facilitate large secondary stock offerings in Canada and other commonwealth countries. We find that while the trading of IRs generally increases the underlying stocks' trading volume, it generally does not have a significant effect on the underlying volatility or systematic risk. Therefore, the use of IRs in secondary offerings will not destabilize the underlying markets and thus will not adversely affect the welfare of the buyers and the remaining shareholders.