Role of derivatives market in attenuating underreaction to left-tail risk

Document Type

Article

Publication Title

Journal of Futures Markets

Abstract

The anomalous negative relationship between left-tail risk measures and future returns has recently attracted the attention of finance researchers. We examine the role of the derivatives market in attenuating left-tail risk anomaly in India, where derivatives trade only for a subset of stocks. We find that the negative association between left-tail risk measure and future return is absent only in stocks having derivatives, indicating that derivatives trading hastens the diffusion of negative information into the stock prices. We find evidence that the information generation role of derivatives markets plays a primary role compared to investor inattention and limits to arbitrage.

Publication Date

25-12-2023

Publisher

Wiley

Volume

Vol.44

Issue

Iss.3

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