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Physical settlement, liquidity, and price discovery in single stock futures; evidence from Panel Vector Error Correction Model

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  • Jena, Sangram Keshari
  • Lahiani, Amine

Abstract

This study examines the price discovery in the single-stock spot and futures markets following the introduction of physical settlement in the world’s largest derivatives exchange using the novel Panel Vector Error Correction Model (PVECM). Analyzing data for ten years across stocks with varying liquidity, the full sample results indicate no meaningful price discovery between the two markets. When segmented by settlement regime, significant futures-led price discovery is observed only in the pre-physical settlement period. Liquidity in either the spot or futures market does not enhance price discovery under physical settlement. Time-varying estimates highlight notable structural breaks attributed to regulatory actions and geopolitical developments. Overall, the findings suggest that physical settlement does not achieve its intended objective of improving price discovery. Two policy implications emerge: cash settlement appears more effective, and physical settlement may be extended even to relatively illiquid stocks.

Suggested Citation

  • Jena, Sangram Keshari & Lahiani, Amine, 2026. "Physical settlement, liquidity, and price discovery in single stock futures; evidence from Panel Vector Error Correction Model," Finance Research Letters, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:finlet:v:93:y:2026:i:c:s1544612326001340
    DOI: 10.1016/j.frl.2026.109603
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    References listed on IDEAS

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