The Impact of Derivative Trading on the Liquidity Beta of Underlying Stocks in India

This paper examines the impact of changes in aggregate market liquidity on stocks in which derivative trading is allowed. Though the liquidity of the market declines after the introduction of derivative trading, the impact of changes in market liquidity on stocks is critical in asset pricing. We find that the negative value of liquidity beta has increased after the introduction of derivative trading, thus increasing the sensitivity of liquidity shocks on asset prices.