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Price discovery in spot and futures markets: a reconsideration

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  • Erik Theissen

Abstract

We reconsider the issue of price discovery in spot and futures markets. We use a threshold error correction model to allow for arbitrage opportunities to have an impact on the return dynamics. We estimate the model using quote midpoints, and we modify the model to account for time-varying transaction costs. We find that (a) the futures market leads in the process of price discovery and (b) the presence of arbitrage opportunities has a strong impact on the dynamics of the price discovery process.

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File URL: http://hdl.handle.net/10.1080/1351847X.2011.601643
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Bibliographic Info

Article provided by Taylor and Francis Journals in its journal The European Journal of Finance.

Volume (Year): 18 (2012)
Issue (Month): 10 (November)
Pages: 969-987

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Handle: RePEc:taf:eurjfi:v:18:y:2012:i:10:p:969-987

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  1. Thorsten Freihube & Erik Theissen, 2001. "An Index Is An Index Is An Index?," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 53(4), pages 295-320, October.
  2. Dwyer, Gerald P, Jr & Locke, Peter R & Yu, Wei, 1996. "Index Arbitrage and Nonlinear Dynamics between the S&P 500 Futures and Cash," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 301-32.
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