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Pricing Dynamics between Single Stock Futures and the Underlying Spot Security

Author

Listed:
  • Vaneesha Boney

    (University of Denver, U.S.A.)

  • Christos Giannikos

    (Department of Economics and Finance, Baruch College, City University of New York, U.S.A.)

  • Hany Guirguis

    (Manhattan College, U.S.A.)

Abstract

This paper examines the pricing dynamics between single stock futures (SSF) and the underlying spot security. The sample period in this analysis allows us to examine this relationship across a market cycle and regulation changes that would potentially impact this relationship. We find that the spot market leads the SSF market and contributes roughly 70% to price discovery. Unlike what has been documented in prior research, this relationship holds during significant periods of market distress. However, we find that the pricing contribution deteriorated in 2010, and this state persisted through the end of our sample period. We posit that this is the result of a change in regulation SHO, which amended existing restrictions on short selling. Specifically, this change likely increased the rebate rate charged by brokers for locating the stock to be shorted and subsequently caused SSF in our sample to trade in backwardation, thus disrupting the pricing relationship previously found.

Suggested Citation

  • 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.
    • Handle: RePEc:ijb:journl:v:17:y:2018:i:2:p:179-191
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    References listed on IDEAS

    as
    1. Kuldeep Shastri & Ramabhadran S. Thirumalai & Chad J. Zutter, 2008. "Information revelation in the futures market: Evidence from single stock futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 28(4), pages 335-353, April.
    2. Gloria González-Rivera & Steven M. Helfand, 2001. "The Extent, Pattern, and Degree of Market Integration: A Multivariate Approach for the Brazilian Rice Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 576-592.
    3. 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.
    4. Hasbrouck, Joel, 1995. "One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-1199, September.
    5. Ang, James S. & Cheng, Yingmei, 2005. "Single stock futures: Listing selection and trading volume," Finance Research Letters, Elsevier, vol. 2(1), pages 30-40, March.
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    Cited by:

    1. Guntur Anjana Raju & Sanjeeta Shirodkar, 2020. "The Lead Lag Relationship between Spot and Futures Markets in the Energy Sector: Empirical Evidence from Indian Markets," International Journal of Energy Economics and Policy, Econjournals, vol. 10(5), pages 409-414.

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    More about this item

    Keywords

    price dynamics; price discovery; single stock futures; financial crisis;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • G00 - Financial Economics - - General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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