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Price discovery in spot and futures markets: a reconsideration

  • Erik Theissen

We reconsider the issue of price discovery in spot and futures markets. We use a threshold error correction model to allow for arbitrage opportunities 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 (a) the futures market leads in the process of price discovery and (b) the presence of arbitrage opportunities has a strong impact on the dynamics of the price discovery process.

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File URL: http://hdl.handle.net/10.1080/1351847X.2011.601643
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Article provided by Taylor & Francis Journals in its journal The European Journal of Finance.

Volume (Year): 18 (2012)
Issue (Month): 10 (November)
Pages: 969-987

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Handle: RePEc:taf:eurjfi:v:18:y:2012:i:10:p:969-987
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  17. 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, vol. 29(3), pages 565-577, March.
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