LIQUIDITY EFFECTS OF THE INTRODUCTION OF THE S-AND-P 500 INDEX FUTURES CONTRACT ON THE UNDERLYING STOCKS

This study examines bid-ask spreads in the stock market around the int roduction of the Standard and Poor's (S&P) 500 index futures contract and tests the following competing hypotheses: (i) stock spreads may wi den as uninformed traders migrate to futures, and (ii) spreads may nar row because specialists can hedge better. Our analysis suggests that, after controlling for changes in other spread determinants, average sp reads of S&P 500 stocks increased significantly. Though an additional test suggests an increase in the adverse-selection component of the sp read in the postfutures period, this increase is not reliably differen t from zero.