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Price Discovery and Liquidity in Basket Securities

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  • Thomas Henker
  • Martin Martens

Abstract

Basket securities enable investors to purchase a broad portfolio of securities in a single transaction. We examine the link between HOLDRS, a basket security comprising stocks from an industry or sector, and the underlying stocks. We find that the price of the portfolio of underlying securities leads and is more informative than the basket price. Our results are contrary to the findings of empirical studies that use futures, which are basket securities with features less like those of the underlying equities. Our findings suggest uninformed investors can minimize adverse selection costs by trading basket securities rather than the underlying stocks.

Suggested Citation

  • Thomas Henker & Martin Martens, 2008. "Price Discovery and Liquidity in Basket Securities," The Financial Review, Eastern Finance Association, vol. 43(2), pages 219-239, May.
    • Handle: RePEc:bla:finrev:v:43:y:2008:i:2:p:219-239
    DOI: 10.1111/j.1540-6288.2008.00192.x
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    Cited by:

    1. Prabhdeep Kaur & Jaspal Singh, 2021. "Impact of ETF Listing on the Returns Generated by Underlying Stocks: Indian Evidence," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 46(3), pages 263-288, August.
    2. Li, Mingsheng & Zhao, Xin, 2014. "Impact of leveraged ETF trading on the market quality of component stocks," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 90-108.

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