The study investigates the impact of derivatives listing on stock prices in the Indian capital markets. Significant positive abnormal return around derivative listing is found lending support to the market completion hypothesis. The results support the evidence obtained in the US, the UK and other developed countries that introduction of derivatives increases the opportunity set to invest in the markets and improves the overall efficiency of the capital markets.

Derivative instruments like futures and options are extremely versatile securities that can be used in many different ways. Traders can use these instruments to speculate, while hedgers can use them to reduce the risk of holding an asset and arbitragers can exploit the mispricing in the markets. The presence of these instruments allows investors to explore strategies which are otherwise not possible and make markets more efficient.

The effect of derivative introduction on the underlying securities has been widely studied in financial literature. According to Black and Scholes (1973), options listing should have no effect on stock returns as option prices are not a function of stock returns, whereas empirical evidence shows both positive and negative price effect due to option listings. According to Hakansson (1982), Detemple (1990) and Detemple and Selden (1991), introduction of option contracts has positive price impact, while negative price effect has been reported by Miller (1977) and Danielsen and Sorescu (2001). As theory provides no indication of the direction or magnitude of option listing effects, empirical research has gained momentum in this area.

Applied Economics Journal, Derivatives Listing, Derivatives Market, National Stock Exchange (NSE) , S&P CNX Nifty, Black and Scholes, Indian Stock Market.