Price discovery in the treasury futures market

The paper conducts a regression analysis utilizing both futures and cash market prices and net orderflow to determine where price discovery takes place as well as the forces at play that influence the location. Specifically, given the strong theoretical linkage between the U.S. Treasury cash and futures markets, they compare how orderflow contributes to price discovery and analyze how and when information flows from one market to the other. How a number of environmental variables (trader type, financing rates, and liquidity) impact the information flows between these two markets is also considered. Their findings provide new evidence on the extent to which price discovery happens away from a primary market. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27: 1021–1051, 2007     

Price discovery and investor structure in stock index futures

Previous literature on price discovery in stock index futures and spot markets neglects the role of different investor groups. This study relates time‐varying spot‐futures linkages studied within a VECM‐DCC‐GARCH framework to changes in the investor structure of the futures market over time. Empirical results suggest that during the dominance of presumably uninformed private investors, the futures market does not contribute to price discovery. By contrast, there is evidence of information flows from futures to spot markets and a significant increase in conditional correlation between both markets as institutional investors' share in trading volume increases. We derive implications for the design of emerging futures markets. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark31:282–306, 2011     

The impact of the US stock market opening on price discovery of government bond futures

We examine price discovery in sequential markets for the 10-year US Treasury note, German bund, and UK gilt futures over the period 2010–2017. We find that price discovery increases after the opening of the US stock market. Order flows in the bond futures markets are more informative for permanent price changes in the 30-min period after the US stock market opens. A placebo test using US statutory holidays confirms our findings. A cross-market analysis suggests that the increased price discovery in the bond futures is related to returns and net order flows of the US stock market.     

Price discovery in the foreign exchange futures market

Examination is made of the relative contributions to price discovery of the floor and electronically traded euro FX and Japanese yen futures markets and the corresponding retail on‐line foreign exchange spot markets. GLOBEX electronic futures contracts provide the most price discovery in the euro; the on‐line trading spot market provides the most in the Japanese yen. The floor‐traded futures markets contribute the least to price discovery in both the euro and the Japanese yen markets. The overall results show that electronic trading platforms facilitate price discovery more efficiently than floor trading. Futures traders may also extract information from on‐line spot prices. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1131–1143, 2006     

Do small traders contribute to price discovery? Evidence from the Hong Kong Hang Seng Index markets

Using one‐contract‐size trades in the Mini Hang Seng Index futures to proxy the activities of small traders, this study empirically investigates the information contribution of small futures traders to price discovery on the Hang Seng Index (HSI) markets. Estimated with the models of Gonzalo, J., and Granger, C. W. J. ( 1995 ) and Hasbrouck, J. ( 1995 ), the results show that small traders contribute about 16.8% to price discovery, a disproportionately high share considering their relatively low trading volume. The results also indicate that the Hang Seng Index futures (HSIF) market still has the largest information share (about 71.0%), whereas the HSI spot market has a 12.2% share. Our results suggest that small traders are not uninformed in the HSIF markets, and play an important role in price discovery. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:156–174, 2010     

Price discovery in the hang seng index markets: Index,futures, and the tracker fund

In this paper, price discovery among the Hang Seng Index markets is investigated using the Hasbrouck and Gonzalo and Granger common‐factor models and the multivariate generalized autoregressive conditional heteroskedasticity (M‐GARCH) model. Minute‐by‐minute data from the Hang Seng Index, Hang Seng Index futures, and the tracker fund show that the movements of the three markets are interrelated. The futures markets contain the most information, followed by the spot market. The tracker fund does not contribute to the price discovery process. The three markets exhibit spillover effects, indicating that their second moments are linked, even though the flow of information from the tracker fund to the other markets is minimal. Overall results suggest that the three markets have different degrees of information processing abilities, although they are governed by the same set of macroeconomic fundamentals. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:887–907, 2004     

Do futures lead price discovery in electronic foreign exchange markets?

Using intraday data, this study investigates the contribution to the price discovery of Euro and Japanese Yen exchange rates in three foreign exchange markets based on electronic trading systems: the CME GLOBEX regular futures, E‐mini futures, and the EBS interdealer spot market. Contrary to evidence in equity markets and more recent evidence in foreign exchange markets, the spot market is found to consistently lead the price discovery process for both currencies during the sample period. Furthermore, E‐mini futures do not contribute more to the price discovery than the electronically traded regular futures. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:137–156, 2009     

The contribution of a satellite market to price discovery: Evidence from the Singapore exchange

The Singapore Exchange (SGX), a small satellite market, successfully competes with a large home market, the Osaka Securities Exchange (OSE), in trading the Nikkei 225 futures index. In this paper, we investigate the contribution of the SGX to price discovery and shed light on the reasons for its continued success. Evidence is provided from information revelation and price discovery of three competing but informationally linked markets of the Nikkei 225 index—domestic spot (Tokyo Stock Exchange), domestic futures (OSE), and foreign futures (SGX), which represents the satellite market. Overall, the futures market contributes 77% to price discovery, with the satellite market contributing 42% of the futures and 33% of the total price discovery. These figures, surprisingly, far exceed the satellite market's share of trading volume. Support is provided for the extended trading hours on the SGX for three of the four non‐overlapping trading sub‐periods. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:981–1004, 2004     

The determinants of price discovery on bitcoin markets

This paper investigates whether market quality, uncertainty, investor sentiment and attention, and macroeconomic news affect bitcoin price discovery in spot and futures markets. Over the period December 2017–March 2019, we find significant time variation in the contribution to price discovery of the two markets. Increases in price discovery are mainly driven by relative trading costs and volume, and uncertainty to a lesser extent. Additionally, medium-sized trades contain most information in terms of price discovery. Finally, higher news-based bitcoin sentiment increases the informational role of the futures market, while attention and macroeconomic news have no impact on price discovery.     

Intraday price discovery and volatility transmission in stock index and stock index futures markets: Evidence from China

Using high‐frequency data, this study investigates intraday price discovery and volatility transmission between the Chinese stock index and the newly established stock index futures markets in China. Although the Chinese stock index started a sharp decline immediately after the stock index futures were introduced, the cash market is found to play a more dominant role in the price discovery process. The new stock index futures market does not function well in its price discovery performance at its infancy stage, apparently due to high barriers to entry into this emerging futures market. Based on a newly proposed theoretically consistent asymmetric GARCH model, the results uncover strong bidirectional dependence in the intraday volatility of both markets. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark     

Causality in the VIX futures market

This study examines the price‐discovery function and information efficiency of a fast growing volatility futures market: the Chicago Board of Option Exchange VIX futures market. A linear Engle–Granger cointegration test with an error correction mechanism (ECM) shows that during the full sample period, VIX futures prices lead spot VIX index, which implies that the VIX futures market has some price‐discovery function. But a modified Baek and Brock nonlinear Granger test detects bi‐directional causality between VIX and VIX futures prices, suggesting that both spot and futures prices react simultaneously to new information. Quarter‐by‐quarter investigations show that, on average, the estimated parameters are not significantly different from zero, thus providing further evidence supporting information efficiency in the VIX futures market. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark     

中美玉米期货市场功能效率比较

价格发现与套期保值是期货市场的基本功能,能够反映期货市场的运行效率。通过对比中美贸易摩擦前后期货市场的价格发现和套期保值功能,分析中美玉米期货市场效率间的差距,探究我国玉米期货市场运行效率低的原因。利用格兰杰(Granger)因果分析、协整检验、分位信息份额模型、套期保值比率及绩效分析方法,定量对中美两国2013—2019年玉米期货及现货的数据进行分析,结果表明,中国玉米期货市场存在较强的价格发现功能,但套期保值绩效不佳。使用前沿分位信息份额模型和滚动格兰杰因果法分析中美两国期现货市场动态关系的区别,发现中国仅存期货市场对现货市场的单向引导,而美国在中美贸易摩擦前表现为玉米期现货市场具有相近的引导能力,套期保值效率较高,中美贸易摩擦增强了其现货市场对期货市场的引导能力,降低了期货市场运行效率。从期现货市场双向引导关系视角来看,中国玉米期货市场效率低的原因主要是现货市场的信息不完全、发展不完善,期现货市场缺少长期稳定的双向引导关系抑制了期货市场功能发挥。中国应全面加强期货市场建设,提升期货市场定价效率,推动农产品期货市场快速健康发展。     

Do designated market makers improve liquidity in open‐outcry futures markets?

On February 1, 2002, the Chicago Board of Trade appointed a designated market maker to enhance liquidity in its 10‐year interest rate swap futures contract. This market‐making program is the first of its kind in the open‐outcry futures industry. We find that introduction of the market maker has increased volume and reduced transaction costs. The market maker has also enhanced the speed and the efficiency of price discovery. Overall, the results suggest that the market‐making program is successful in improving liquidity. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:479–502, 2004     

Price discovery among SSE 50 Index-based spot,futures, and options markets

This paper studies the contribution of newly launched SSE 50 Index-based options and futures to price discovery. We find that the derivatives markets quickly begin exhibiting price leadership over the corresponding spot market, despite their short history; the information share from both derivatives markets rose from 59.84% in mid-2015 to 84.6% in mid-2017. Using substantial regulation changes during the sample period, we test the trading cost hypothesis. The increases in derivatives transaction costs do not immediately impede their roles in price discovery. Findings suggest that in nascent and immature markets, investors’ trading experience matters more than trading costs.     

The intra‐day price discovery process between the Singapore Exchange and Taiwan Futures Exchange

This paper focuses on the increasing competition between exchanges for listing similar index futures contracts and the impact this has on information dissemination between various markets. Specifically, using both the Hasbrouck and Gonzalo–Granger methodologies for extracting the information content held in each market, a comparison of information efficiencies between the Singapore Exchange and the Taiwan Futures Exchange is examined for Taiwan Index Futures listed in both markets. The results show not only a common stochastic trend between index futures and their underlying indices, but also provide strong evidence to suggest price discovery primarily originates from the Singapore futures market. There are direct implications of this result for both financial exchanges and traders—in particular, that traders realize price determination can arise from both futures markets, and the need for exchanges to maintain a reputation as an information center for these similarly traded financial instruments. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 219–240, 2002     

Market Efficiency and Price Discovery in Cocoa Markets

ABSTRACT

This paper tests the efficiency and price discovery mechanism in the cocoa cash and futures markets over the period March 1981–August 2009. The results indicate that the price discovery is done in the cash market and spreads to the futures markets and that the futures price can be seen as an unbiased predictor of future cash prices. There is no sign of a risk premium in the futures price. Since the cash behaves like a random walk we cannot reject market efficiency.     

Does tick size influence price discovery? Evidence from the Toronto Stock Exchange

We investigate the price discovery role of an exchange‐traded fund and the futures contract for the same market index. We find that the fund predicts the index in the subperiod after but not in the subperiod before a substantial decrease in the minimum tick size. The futures predict the index in both subperiods. The results are consistent with the view that the factors leading to successful price discovery do not depend on zero investment, as in futures markets, but do depend on a small tick size. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:49–66, 2003     

Quantile information share

This paper presents a new method to estimate Hasbrouck-type market information share in price discovery. The prevailing market information share is calculated on the basis of conditional mean. We propose a conditional quantile regression approach to obtain a new market information share measure, quantile information share, which varies across the combinations of different price quantiles. The method is illustrated with two data sets, one on the spot and futures markets in pricing S&P 500 equity index, and the other on price discovery for a cross-listed stock.     

Need for speed: Hard information processing in a high‐frequency world

I study the role of high‐frequency traders (HFTs) and non‐high‐frequency traders (nHFTs) in transmitting hard price information from the futures market to the stock market using an index arbitrage strategy. Using intraday transaction data with HFT identification, I find that HFTs process hard information faster and trade on it more aggressively than nHFTs. In terms of liquidity supply, HFTs are better at avoiding adverse selection than nHFTs. Consequently, HFTs enhance the linkage between the futures and stock markets, and significantly contribute to information efficiency in the stock market by reducing the delay between the stock and the futures markets.     

Price impact asymmetry of futures trades: Trade direction and trade size

By analyzing the high-quality intraday transaction dataset of KOSPI200 index futures contracts, one of the most actively traded index futures products in the world, this study examines price impact asymmetry between buyer- and seller-initiated trades and the difference in information content across the size of trades. To measure the permanent price impact incurred by each futures trade, which can be translated into the quality of information content of each trade, we use a modified version of the MRR model (Madhavan et al., 1997), which is appropriate for gauging the price impact and information content as well as analyzing the intraday price discovery issues that arise in purely order-driven markets.Consistent with the empirical results of previous studies on market microstructure issues in Korea's index derivatives market (i.e., KOSPI200 index futures and options market), we find that large trades generally incur greater permanent price impacts than small trades. This indicates that large trades generally have greater information content than the smaller ones. However, in contrast to the majority of empirical studies in this area, which have reported that buy trades are more informative than sell trades in global financial markets, we find that the permanent price impact of seller-initiated trades is clearly and substantially larger than that of buyer-initiated trades in the KOSPI200 futures market. This indicates that sell trades are more informed than buy trades in the index futures market, where informed investors can freely submit sell orders without any restrictions. The greater information content of sell trades is also apparent when trades are classified by their size. These results are quite remarkable considering that the sample period of this study (2003–2006) corresponds to a recovery period, during which the underlying stock index price and the futures price continued to increase.