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A model of price discovery and market design: Theory and empirical evidence

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  • Michael T. Chng

Abstract

Price discovery is an essential function performed by derivative markets. For a derivative exchange, its markets' ability to incorporate information into prices to “derive” the underlying asset's value is a key objective of market design. The J. Hasbrouck (1991a) model is applied to examine the design and price discovery of a futures market. First, the model is extended to consider a comprehensive dynamic interaction between the price‐size coordinates of orders and trades. Second, floor and screen tick data from LIFFE's FTSE 100 index futures market is used to estimate the two models. The significance of order size variables in the extended model suggests that order flow transparency, which is supported by an electronic trading platform, improves price discovery. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:1107–1146, 2004

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  • Michael T. Chng, 2004. "A model of price discovery and market design: Theory and empirical evidence," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(12), pages 1107-1146, December.
    • Handle: RePEc:wly:jfutmk:v:24:y:2004:i:12:p:1107-1146
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    Cited by:

    1. Kepulaje Abhaya Kumar & Cristi Spulbar & Prakash Pinto & Iqbal Thonse Hawaldar & Ramona Birau & Jyeshtaraja Joisa, 2022. "Using Econometric Models to Manage the Price Risk of Cocoa Beans: A Case from India," Risks, MDPI, vol. 10(6), pages 1-18, June.
    2. Zi Ning & Yiuman Tse, 2009. "Order Imbalance in the FTSE Index Futures Market: Electronic versus Open Outcry Trading," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1-2), pages 230-252.
    3. Zi Ning & Yiuman Tse, 2009. "Order Imbalance in the FTSE Index Futures Market: Electronic versus Open Outcry Trading," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 230-252, January.
    4. Edward Curran & Jack Hunt & Vito Mollica, 2020. "Trading protocols and price discovery: Implicit transaction costs in Indian single stock futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(11), pages 1793-1806, November.

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