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Price discovery in the S&P 500 index derivatives markets

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  • Chen, Wei-Peng
  • Chung, Huimin
  • Lien, Donald

Abstract

This study sets out to examine the dynamics of price discovery between the S&P 500 index and its derivative products: the index futures, the index options, the S&P 500 exchange-traded funds (SPDRs), and the SPDR options. Empirical results reveal that overall the contribution of SPDRs to price discovery exceeds the contribution of E-mini index futures except in the high volatility period. However, E-mini index futures contribute higher information share than SPDRs in the high volatility sub-period, indicating that E-mini index futures play an important role on hedge strategies. The results are associated with (i) increasing institutional ownership in SPDRs and (ii) the rapid growth of algorithmic trading (AT) and high-frequency trading (HFT) by institutional investors.

Suggested Citation

  • Chen, Wei-Peng & Chung, Huimin & Lien, Donald, 2016. "Price discovery in the S&P 500 index derivatives markets," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 438-452.
  • Handle: RePEc:eee:reveco:v:45:y:2016:i:c:p:438-452
    DOI: 10.1016/j.iref.2016.07.008
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    Cited by:

    1. Chunhachinda, Pornchai & de Boyrie, Maria E. & Pavlova, Ivelina, 2019. "Measuring the hedging effectiveness of commodities," Finance Research Letters, Elsevier, vol. 30(C), pages 201-207.
    2. Lin, William T. & Tsai, Shih-Chuan & Zheng, Zhenlong & Qiao, Shuai, 2018. "Retrieving aggregate information from option volume," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 220-232.
    3. Lien, Donald & Hung, Pi-Hsia & Lin, Zong-Wei, 2020. "Whose trades move stock prices? Evidence from the Taiwan Stock Exchange," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 25-50.
    4. Chen, Wei-Peng & Ling Lin, Shu & Lu, Jun & Wu, Chih-Chiang, 2018. "The impact of funding liquidity on market quality," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 153-166.
    5. Donald Lien & Zijun Wang, 2019. "Quantile information share," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(1), pages 38-55, January.

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