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Price discovery in spot and futures markets: A reconsideration

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  • Theissen, Erik

Abstract

We reconsider the issue of price discovery in spot and futures markets. We use a threshold error correction model to allow for arbitrage operations 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 the futures market leads in the process of price discovery. The lead of the futures market is more pronounced in the presence of arbitrage signals. Thus, when the deviation between the spot and the futures market is large, the spot market tends to adjust to the futures market. --

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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2009/27.

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Date of creation: 2009
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Handle: RePEc:zbw:cfswop:200927

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Keywords: Futures Markets; Threshold Error Correction; Information Shares; Common Factor Weights;

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  2. Martens, M. & Kofman, P. & Vorst, T.C.F., 1995. "A Threshold Error Correction Model for Intraday Futures and Index Returns," Monash Econometrics and Business Statistics Working Papers, Monash University, Department of Econometrics and Business Statistics 14/95, Monash University, Department of Econometrics and Business Statistics.
  3. Hasbrouck, Joel, 1995. " One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, American Finance Association, vol. 50(4), pages 1175-99, September.
  4. Gonzalo, Jesus & Granger, Clive W J, 1995. "Estimation of Common Long-Memory Components in Cointegrated Systems," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(1), pages 27-35, January.
  5. Yiuman Tse & Paramita Bandyopadhyay & Yang-Pin Shen, 2006. "Intraday Price Discovery in the DJIA Index Markets," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 33(9-10), pages 1572-1585.
  6. Theissen, Erik, 2002. "Price discovery in floor and screen trading systems," Journal of Empirical Finance, Elsevier, Elsevier, vol. 9(4), pages 455-474, November.
  7. Berkman, Henk & Brailsford, Tim & Frino, Alex, 2005. "A note on execution costs for stock index futures: Information versus liquidity effects," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(3), pages 565-577, March.
  8. Grunbichler Andreas & Longstaff Francis A. & Schwartz Eduardo S., 1994. "Electronic Screen Trading and the Transmission of Information: An Empirical Examination," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 3(2), pages 166-187, March.
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  18. Thorsten Freihube & Erik Theissen, 2001. "An Index Is An Index Is An Index?," Schmalenbach Business Review (sbr), LMU Munich School of Management, LMU Munich School of Management, vol. 53(4), pages 295-320, October.
  19. Frank de Jong, 2001. "Measures of Contributions to Price Discovery: A Comparison," Tinbergen Institute Discussion Papers 01-114/2, Tinbergen Institute.
  20. Terrence Hendershott & Charles M. Jones, 2005. "Island Goes Dark: Transparency, Fragmentation, and Regulation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 18(3), pages 743-793.
  21. Yan, Bingcheng & Zivot, Eric, 2010. "A structural analysis of price discovery measures," Journal of Financial Markets, Elsevier, Elsevier, vol. 13(1), pages 1-19, February.
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