When do stock futures dominate price discovery
AbstractStock futures offer leveraged positions and are expected to attract informed traders. However, many researchers have found that the information share of the stock futures is surprisingly small; the equity spot market appears to play a large role in price discovery. In this paper, we investigate this phenomenon and offer two findings. First, liquidity of the stock futures plays a major role in influencing price discovery. The securities where the spot market plays a major role tend to be those with illiquid stock futures. The enhanced transactions costs appear to counterbalance the gains from leveraged trading. In addition, when large price movements take place, the stock futures appear to play a much more important role. These findings help fill out our understanding of the role of the equity spot and single stock futures markets in price discovery.
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Bibliographic InfoPaper provided by Indira Gandhi Institute of Development Research, Mumbai, India in its series Indira Gandhi Institute of Development Research, Mumbai Working Papers with number 2011-016.
Length: 40 pages
Date of creation: Aug 2011
Date of revision:
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price discovery; single stock futures; leverage trading; liquidity effects;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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