IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Informed Trading, Short Sales Constraints, and Futures' Pricing

Listed author(s):
  • Hietala, Pekka



  • Jokivuolle, Esa


    (Bank of Finland)

  • Koskinen, Yrjö


    (Dept. of Finance, Stockholm School of Economics)

The purpose of this paper is to provide an explanation for relative pricing of futures contracts with respect to underlying stocks based on short sales constraints and informational lags between the two markets. In this model stocks and futures are perfect substitutes, except that short sales are only allowed in futures markets. The futures price is more informative than the stock price, because the existence of short sales constraints in the stock market prohibits trading in some states of the world. If an informed trader with no initial endowment in stocks gets a negative signal about the common future value of stocks and futures, she is only able to sell futures. In addition uninformed traders also face similar short sales constraint in the stock market. As a result of the short sales constraint, the stock price is less informative than the futures price even if the informed trader has received positive information. Stocks can be under- and overpriced compared to futures, provided that market makers in stocks and futures only observe with a lag the order flow in the other market. Our theory implies that 1.) the basis is positively associated with the contemporaneous futures returns, 2.) the basis is negatively associated with the contemporaneous stock return, 3.) futures returns lead stock returns, 4.) stock returns also lead futures returns, but to a lesser extent and 5.) the trading volume in the stock market is positively associated with the contemporaneous stock return. The model is tested using daily data from the Finnish index futures markets. Finland provides a good environment for testing our theory, since short sales were not allowed during the time that we have data (May 27, 1988 - May 31, 1994). We find strong empirical support for our implications.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

File URL:
Download Restriction: no

File URL:
Download Restriction: no

File URL:
Download Restriction: no

Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 366.

in new window

Length: 34 pages
Date of creation: 17 Mar 2000
Handle: RePEc:hhs:hastef:0366
Contact details of provider: Postal:
The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden

Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:hhs:hastef:0366. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Helena Lundin)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.