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Intraday Price Discovery in the DJIA Index Markets

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  • Yiuman Tse
  • Paramita Bandyopadhyay
  • Yang-Pin Shen
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    Abstract

    This paper explores the dynamics of price discovery between the Dow Jones Industrial Average (DJIA) index and its three derivative products: the DIAMOND exchange-traded fund (ETF), the floor-traded regular futures, and the electronically traded mini futures. Even though the American Stock Exchange is the primary listing exchange for the ETF, the analysis indicates that the electronically traded ETF on the Archipelago (ArcaEx) electronic communications network dominates the price discovery process for DIAMOND shares. The E-mini futures contribute the most to price discovery, followed by the ArcaEx DIAMOND. The DJIA index and regular futures contribute least to price discovery. The analysis is repeated using the derivatives of the S&P 500 index as a robustness check. The results indicate that multi-market trading ensures greater pricing efficiency. Informed traders favor electronic trading because of immediate and anonymous trade execution. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 33 (2006-11)
    Issue (Month): 9-10 ()
    Pages: 1572-1585

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    Handle: RePEc:bla:jbfnac:v:33:y:2006-11:i:9-10:p:1572-1585

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    Cited by:
    1. Theissen, Erik, 2009. "Price discovery in spot and futures markets: A reconsideration," CFR Working Papers 09-17, University of Cologne, Centre for Financial Research (CFR).
    2. Marc Simpson & Jose Moreno & Teofilo Ozuna, 2012. "The makings of an information leader: the intraday price discovery process for individual stocks in the DJIA," Review of Quantitative Finance and Accounting, Springer, vol. 38(3), pages 347-365, April.
    3. Kenneth Small & James Wansley & Matthew Hood, 2012. "The impact of security concentration on adverse selection costs and liquidity: an examination of exchange traded funds," Journal of Economics and Finance, Springer, vol. 36(2), pages 261-281, April.
    4. Ivanov, Stoyu I. & Jones, Frank J. & Zaima, Janis K., 2013. "Analysis of DJIA, S&P 500, S&P 400, NASDAQ 100 and Russell 2000 ETFs and their influence on price discovery," Global Finance Journal, Elsevier, vol. 24(3), pages 171-187.
    5. Wang, Yun-Yi & Chang, Chiung-Chiao & Lee, Wan-Chen, 2013. "Price discovery between regular and mini index futures in the Taiwan Futures Exchange," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 224-237.
    6. William Bertin & Paul Fowler & David Michayluk & Laurie Prather, 2010. "An analysis of Australian exchange traded options and warrants," Journal of Economics and Finance, Springer, vol. 34(2), pages 150-172, April.

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