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Efficiency of single‐stock futures: An intraday analysis

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  • Joseph K.W. Fung
  • Yiuman Tse

Abstract

Using intraday bid–ask quotes of single‐stock futures (SSFs) contracts and the underlying stocks, the pricing and informational efficiency of SSF traded on the Hong Kong Exchange are examined. Both the SSFs and the stocks are traded on electronic platforms. The market microstructure and the data obviate the problems of stale and non‐executable prices as well as uncertain bid–ask bounce of the thinly traded futures contracts. Nominal price comparisons show that more than 80% of SSF quotes are inferior to stock quotes. More than 99% of the observed futures spreads are above one stock tick compared with only 2% of those for stocks. After adjusting for the cost‐of‐carry, however, SSFs are fairly priced. Given higher stock trading costs, non‐members should even find the futures attractively priced. Thus, the absence of competitive market maker does not bias prices so as to discourage trading. SSF quotes also account for one‐third of price discovery despite their low volume. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:518–536, 2008

Suggested Citation

  • Joseph K.W. Fung & Yiuman Tse, 2008. "Efficiency of single‐stock futures: An intraday analysis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(6), pages 518-536, June.
    • Handle: RePEc:wly:jfutmk:v:28:y:2008:i:6:p:518-536
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    Cited by:

    1. Edward Curran & Jack Hunt & Vito Mollica, 2021. "Single stock futures and their impact on market quality: Be careful what you wish for," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(11), pages 1677-1692, November.
    2. Jiang, George J. & Shimizu, Yoshiki & Strong, Cuyler, 2022. "Back to the futures: When short selling is banned," Journal of Financial Markets, Elsevier, vol. 61(C).
    3. Olaf Korn & Paolo Krischak & Erik Theissen, 2019. "Illiquidity transmission from spot to futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(10), pages 1228-1249, October.
    4. George J. Jiang & Yoshiki Shimizu & Cuyler Strong, 2020. "When trading options is not the only option: The effects of single‐stock futures trading on options market quality," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(9), pages 1398-1419, September.
    5. Vaneesha Boney & Christos Giannikos & Hany Guirguis, 2018. "Pricing Dynamics between Single Stock Futures and the Underlying Spot Security," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 17(2), pages 179-191, September.
    6. Nidhi Aggarwal & Susan Thomas, 2019. "When stock futures dominate price discovery," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(3), pages 263-278, March.
    7. Byoung-Hyoun Hwang & Baixiao Liu & Wei Xu, 2019. "Arbitrage Involvement and Security Prices," Management Science, INFORMS, vol. 67(6), pages 2858-2875, June.
    8. Chen-Yu Chen & Jian-Hsin Chou & Hung-Gay Fung & Yiuman Tse, 2017. "Setting the futures margin with price limits: the case for single-stock futures," Review of Quantitative Finance and Accounting, Springer, vol. 48(1), pages 219-237, January.

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