The Evolving Role of Derivatives in Enhancing Market Efficiency and Risk Management: A Comparative Analysis of the 2008 Global Financial Crisis and the 2020 COVID-19 Shock
DOI:
https://doi.org/10.54097/c683s906Keywords:
Derivatives; Market Efficiency; Risk Management; Financial Crisis.Abstract
This study examines the changing role of derivatives in improving market efficiency and aiding risk management by analyzing their performance during the 2008 Global Financial Crisis and the 2020 COVID-19 pandemic. Based on the theoretical frameworks of the price discovery mechanism, the Efficient Market Hypothesis and contemporary risk management theory, the analysis employs both qualitative and quantitative methodologies. Methodologically, we utilize GARCH-class models to analyze volatility dynamics, perform event study analysis to assess atypical market reactions, and implement the Vector Error Correction Model (VECM) to investigate the long-term information transmission between derivatives and spot markets. The results reveal a structural shift in the function of derivatives. During the 2008 crisis, complicated over-the-counter instruments like CDOs and CDSs made systemic risk worse because they were hard to understand and there weren't enough rules. In contrast, derivatives markets were more stable during the COVID-19 pandemic, thanks to reforms made after the 2008 financial crisis, such as central clearing mandates and better transparency. Derivatives helped find prices and move risk around when things got tough. This paper also looks at the differences between ASEAN and GCC markets, focusing on how changes in regulations and new technologies (like algorithmic trading and RegTech) will affect the future development of the derivatives market. The results show that derivatives need to be integrated into global financial systems in a healthy way, which requires a strong regulatory framework, infrastructure driven by innovation, and education for investors.
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