Price discovery on the S&P 500 index markets: An analysis of spot index,index futures,and SPDRs

This paper investigates the price discovery function in three S&P 500 index markets: the spot index, index futures, and S&P Depositary Receipts markets. Four hypotheses regarding market structure and security design are proposed to differentiate the price discovery function performed by the three index instruments. Using matched synchronous intraday trading data, Johansen's maximum likelihood estimator is employed to disclose the cointegration relationships among the three markets. Results indicate that the three price series are a cointegrated system with one long-run stochastic trend. Estimated coefficients of the vector error correction model suggest that price adjustment takes place in the spot index market and for SPDRs, but not in the futures market. When the common stochastic trend is decomposed, it is found that the futures market serves the dominant price discovery function. The leverage hypothesis and the uptick rule hypothesis explain its superior price discovery function.     

Market uncertainty,expected volatility and the mispricing of S&P 500 index futures

An association between increased index futures mispricing and concurrent index volatility has been reported within several prior studies; in the present study, we argue that expected volatility over an arbitrage horizon also has an adverse effect on the ability and willingness of traders to engage in arbitrage, leading to greater and more persistent futures mispricing. Using the CBOE VIX and its innovation on the concurrent spot volatility as proxies for expected volatility, we present evidence of an increase in S&P 500 index futures mispricing with expected volatility. The impact of the VIX grows exponentially across the distribution of conditional mispricing levels, which suggests that the expectations of heightened future volatility become increasingly detrimental to arbitrage activities when the futures price deviations are enlarged; however, the influence of expected volatility is found to have been reduced during the global financial crisis period, a period during which concurrent volatility overwhelmingly dominated the magnitude of mispricing.     

Intraday Price Discovery in the DJIA Index Markets

Abstract:  This paper explores the dynamics of price discovery between the Dow Jones Industrial Average (DJIA) index and its three derivative products: the DIAMOND exchange-traded fund (ETF), the floor-traded regular futures, and the electronically traded mini futures. Even though the American Stock Exchange is the primary listing exchange for the ETF, the analysis indicates that the electronically traded ETF on the Archipelago (ArcaEx) electronic communications network dominates the price discovery process for DIAMOND shares. The E-mini futures contribute the most to price discovery, followed by the ArcaEx DIAMOND. The DJIA index and regular futures contribute least to price discovery. The analysis is repeated using the derivatives of the S&P 500 index as a robustness check. The results indicate that multi-market trading ensures greater pricing efficiency. Informed traders favor electronic trading because of immediate and anonymous trade execution.     

Pinning in the S&P 500 futures

We show that Standard & Poor's (S&P) 500 futures are pulled toward the at-the-money strike price on days when serial options on the S&P 500 futures expire (pinning) and are pushed away from the cost-of-carry adjusted at-the-money strike price right before the expiration of options on the S&P 500 index (anti-cross-pinning). These effects are driven by the interplay of market makers' rebalancing of delta hedges due to the time decay of those hedges as well as in response to reselling (and early exercise) of in-the-money options by individual investors. The associated shift in notional futures value is at least $115 million per expiration day.     

Price Discovery,Causality and Forecasting in the Freight Futures Market

This paper investigates the causal relationship between futures and spot prices in the freight futures market. Being a thinly traded market whose underlying asset is a service, sets it apart from other markets investigated so far in the literature. Causality tests, generalised impulse response analysis and forecasting performance evaluation indicate that futures prices tend to discover new information more rapidly than spot prices. Revisions in the composition of the underlying index to make it more homogeneous, have strengthened the price discovery role of futures prices. The information incorporated in futures prices, when formulated as a VECM, produces more accurate forecasts of spot prices than the VAR, ARIMA and random-walk models, over several steps ahead. This revised version was published online in June 2006 with corrections to the Cover Date.     

Intraday Price Formation in U.S. Equity Index Markets

The market for U.S. equity indexes presently comprises floor‐traded index futures contracts, exchange‐traded funds (ETFs), electronically traded, small‐denomination futures contracts (E‐minis), and sector ETFs that decompose the S&P 500 index into component industry portfolios. This paper empirically investigates price discovery in this environment. For the S&P 500 and Nasdaq‐100 indexes, most of the price discovery occurs in the E‐mini market. For the S&P 400 MidCap index, price discovery is shared between the regular futures contract and the ETF. The S&P 500 ETF contributes markedly to price discovery in the sector ETFs, but there are only minor effects in the reverse direction.     

What role do futures markets play in Bitcoin pricing? Causality,cointegration and price discovery from a time-varying perspective?

Recent papers that have explored spot and futures markets for Bitcoin have concluded that price discovery takes place either in the spot, or the futures market. Here, we consider the robustness of previous price discovery conclusions by investigating causal relationships, cointegration and price discovery between spot and futures markets for Bitcoin, using appropriate daily data and time-varying mechanisms. We apply the time-varying Granger causality test of Shi, Phillips, and Hurn [2018]; time-varying cointegration tests of Park and Hahn [1999], and time-varying information share methodologies, concluding that futures prices Granger cause spot prices and that futures prices dominate the price discovery process.     

中国利率市场的价格发现——对国债现货、期货以及利率互换市场的研究

本文采用信息份额模型和基于向量自回归(VAR)模型的格兰杰因果检验,研究了国债现货、国债期货和利率互换三个市场之间的价格发现机制。信息份额模型表明,从整体来看利率互换相对于国债期货和国债现货都具有信息优势,而国债期货相对于国债现货具有信息优势。另外,国债期货的价格发现能力相对于另外两个市场都在随时间增强。格兰杰因果检验结果显示,利率互换在价格发现中单向引领国债期货以及国债现货,国债期货单向引领国债现货。所有结果一致表明, 利率互换和国债期货这两种利率衍生产品在引导中国利率市场价格发现中发挥了重要作用。     

News announcements and price discovery in foreign exchange spot and futures markets

This paper studies competition in price discovery between spot and futures rates for the EUR–USD and JPY–USD markets around scheduled macroeconomic announcements. Using both the information shares approach and the common factor component weight approach for futures prices from the Chicago Mercantile Exchange (CME), as well as deal prices from spot trading on the Electronic Broking Services (EBS), we gauge how foreign exchange spot and futures markets respond to news surprises. The results show that the spot rates provide more price discovery than do the CME futures rates overall; however, the contribution of the futures rates to price discovery increases in the time surrounding macroeconomic announcement releases.     

An alternative approach to evaluating the agreement between financial markets

This research investigates that the price relationship between a stock index and its associated nearby futures markets can be explained by the cost-of-carry model using the concordance correlation (CC) coefficient in the US financial markets. The main purpose of this research is to confirm that the CC coefficient is an appropriate methodology to determine ex post arbitrage opportunities and to maximize ex ante arbitrage profits through the analysis of the price relationship derived from the cost-of-carry model. To increase the robustness of the results and to enable us to generalize our conclusions, this analysis is carried out in consideration of external uncertainty, including the marking-to-market procedure of futures contracts and the transaction cost on the stock index and its futures markets, under several assumptions related to the conditions of transactions. Examining transaction price data on the S&P 500 stock index and its futures markets shows that the CC coefficient gives a good result for ex ante arbitrage profits and is appropriate for analyzing the relationship between the observed stock index futures market price and its theoretical price derived from the cost-of-carry model.     

The impact of multilateral trading facilities on price discovery: Further evidence from the European markets

This study examines relative price discovery for three major European indices, FTSE, CAC, and DAX, their futures and exchange traded funds (ETFs) using the data on 5‐minute intraday transaction prices over a four‐year period. We computed both Hasbrouck (1995) information share with error bounds and Gonzalo and Granger's (1995) common factor weights approach. Gonzalo and Granger's (1995) common factor weights suggest the index futures contracts play a dominant role in price discovery in the CAC market: the CAC 40 index futures lead the price discovery and Lyxor CAC 40 ETFs serving the second resort for information transmission. This could be due to the less frequent trading of ETFs. More importantly, CAC40 under the Gonzalo & Granger (1995) test shows upper and lower error bounds in good range may be the main reason to drive for the meaningful results. In contrast, the upper and lower bounds estimated from the Hasbrouck (1995) are far distant for most cases. Finally, FTSE and DAX markets offer compelling evidence to show that ETFs lead price discovery and spots and futures follows.     

Price discovery in spot and futures markets: a reconsideration

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.     

DID BLACK MONDAY HAVE A PERMANENT EFFECT?

Black Monday caused an immediate disruption between index futures and stock markets, but it is not clear whether it had any lasting effects. Here we examine links between the markets that are sensitive to the liquidity shortages during Black Monday. By employing a tick-by-tick transactions data set of S&P 500 index futures trades and S&P 500 equity index we calculate the spot/futures basis and basis risk, the spot/futures lead/lag relation, and the bid-ask spread. Evidence suggests that Black Monday had little continuing effect. On high-volatility days, however, index arbitrage becomes more costly as prices are more sensitive to future trades.     

Price discovery in bitcoin futures

This paper studies the contribution of the newly launched future contracts to the bitcoin price discovery process. Using well-established methodologies in the literature of the evaluation of price discovery in financial markets, we find evidence that, although the volume of bitcoins traded in the decentralized spot market overwhelms that of the futures market, the latter plays a more important role in incorporating new information about the value of bitcoin. Our empirical investigation also provides evidence of strong bi-directional dependence in the intraday volatility of the spot and futures markets.     

Stock market closure and intraday stock index futures market volatility: “contagion”, bid–ask bias or both?

Chang et al. [Journal of Business 68 (1) (1995) 61] examine the impact of the closure of the New York Stock Exchange (NYSE) on S&P500 stock index futures traded on the Chicago Mercantile Exchange. They document a decline in futures market volatility immediately after the close of the NYSE, and an increase 15 minutes later when the futures market closes. They attribute this to contagion–i.e. a decline in information transfer from equities to futures markets following the closure of the underlying market. This paper examines the impact of the extension of trading hours in Hang Seng Index futures traded on the Hong Kong Futures Exchange on the 20 November, 1998 to 15 minutes after the close of the underlying market (the Stock Exchange of Hong Kong). Using the unique natural experiment provided by this change, a pattern similar to US markets is documented for the Hang Seng Index Futures following the change in trading hours. This provides strong evidence that the intraday pattern in volatility is caused by market closure. Unlike US futures exchanges, price reporters on the floor of the Hong Kong Futures Exchange collect quote data in addition to trade data. This data facilitates a test of another plausible microstructure explanation for the observed behaviour–bid–ask bounce associated with trading activity. This paper provides evidence that bid–ask bounce also explains part of the observed intraday behaviour in price volatility.     

Bounds for VIX futures given S&P 500 smiles

We derive sharp bounds for the prices of VIX futures using the full information of S&P 500 smiles. To that end, we formulate the model-free sub/superreplication of the VIX by trading in the S&P 500 and its vanilla options as well as the forward-starting log-contracts. A dual problem of minimizing/maximizing certain risk-neutral expectations is introduced and shown to yield the same value.The classical bounds for VIX futures given the smiles only use a calendar spread of log-contracts on the S&P 500. We analyze for which smiles the classical bounds are sharp and how they can be improved when they are not. In particular, we introduce a family of functionally generated portfolios which often improves the classical bounds while still being tractable; more precisely, they are determined by a single concave/convex function on the line. Numerical experiments on market data and SABR smiles show that the classical lower bound can be improved dramatically, whereas the upper bound is often close to optimal.     

Testing Greeks and price changes in the S&P 500 options and futures contract: A regression analysis

We use a regression model to test observed price changes with Greeks as regressors. Greeks are computed using implied volatility, price-change implied volatility and historical volatility. We find sufficient evidence to reject model Greeks as unbiased responses to underlying price as well as sufficient evidence that the American version of binomial model results in biased estimates of price changes. We use options on the S&P 500 futures contracts and their underlying. We also evaluate the frequency of “wrong signs.” Call prices and their underlying move in the opposite direction almost 10 percent of the time.     

Informational role of market makers: The case of exchange traded CFDs

This study examines the informational role of market makers in the S&P/ASX 200 CFD (CFD 200) market relative to other alternative index markets. The results reveal that the market for the SPI 200 Index Futures (SPI 200) plays a dominant role in the process of price discovery in the S&P/ASX 200 Index market. The remaining contributions to price discovery are shared between the CFD 200 and SPDR ETF markets; between the two markets, the contribution of the CFD 200 market is substantially greater than that of the SPDR ETF market. This study also provides evidence that innovation correlations between the CFD 200 and SPI 200 markets are considerably larger than those between index-linked instruments reported in prior studies. The results suggest that the CFD 200 market makers mechanically set quotes (“autoquoting”), using limit order prices for the SPI 200 contracts as benchmark quotes.     

A Likelihood Ratio Test of Price Volatilities: Comparing Stock Index Spot and Futures

This paper uses three methods to estimate the price volatility of two stock market indexes and their corresponding futures contracts. The classic variance measure of volatility is supplemented with two newer measures, derived from the Garman-Klass and Ball-Torous estimators. A likelihood ratio test is used to compare the classic variance measure of price volatilities of two stock market indexes and their corresponding futures contracts during the bull market of the 1980s. The stock market volatilities of the Standard & Poor's 500 (S&P 500) and New York Stock Exchange (NYSE) indexes were found to be significantly lower than their respective futures price volatilities. Since information may flow faster in the futures markets than in the corresponding stock market, our results support Ross's information-volatility hypothesis. It was also noted that the NYSE spot volatility was lower than the S&P 500 spot volatility. If the rate of information flow and firm size are positively related, then the lower NYSE spot volatility is explained by the size effect. The futures price volatilities for the two indexes were insignificantly different from each other. With stock index spot-futures price correlations approaching unity, one implication of our results for index futures activity is that smaller positions in futures contracts may suffice to achieve hedging or arbitrage goals.