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Price Leadership between Spot and Futures Markets

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  • Kiran Kumar
  • Chakrapani Chaturvedula

Abstract

This paper aims to study the relative information shares of spot and futures market at the individual stock level to measure the price discovery in spot and futures market in the Indian capital markets. We find that the spot and futures prices are co-integrated and mutually adjusting. Building on Information Share approach of Hasbrouck, the price discovery share of futures segment is about 36% compared to that of spot segment is 64%. It is expected that futures market contribute more towards price discovery given huge trading volumes and they carry the natural advantage of cost-effectiveness in terms of leverage benefit. However, the empirical result (or the fact) is spot market leadership in price discovery and this fact is reconciled by probing the clientele of futures market and is consistent with very active participation of retail traders in futures segment.

Suggested Citation

  • Kiran Kumar & Chakrapani Chaturvedula, 2013. "Price Leadership between Spot and Futures Markets," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 3(1), pages 1-6.
    • Handle: RePEc:spt:apfiba:v:3:y:2013:i:1:f:3_1_6
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    Citations

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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.
    2. Abootaleb Shirvani & Svetlozar T. Rachev & Frank J. Fabozzi, 2019. "A Rational Finance Explanation of the Stock Predictability Puzzle," Papers 1911.02194, arXiv.org.
    3. Madhusudan Karmakar & Sarveshwar Inani, 2019. "Information share and its predictability in the Indian stock market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(10), pages 1322-1343, October.
    4. Xu, Feng & Wan, Difang, 2015. "The impacts of institutional and individual investors on the price discovery in stock index futures market: Evidence from China," Finance Research Letters, Elsevier, vol. 15(C), pages 221-231.
    5. Chen, Xiangyu & Tongurai, Jittima, 2023. "Informational linkage and price discovery between China's futures and spot markets: Evidence from the US–China trade dispute," Global Finance Journal, Elsevier, vol. 55(C).
    6. Sarveshwar Kumar Inani, 2017. "Price discovery in Indian stock index futures market: new evidence based on intraday data," International Journal of Indian Culture and Business Management, Inderscience Enterprises Ltd, vol. 14(1), pages 23-43.

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