When stock futures dominate price discovery |
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Authors: | Nidhi Aggarwal Susan Thomas |
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Institution: | 1. Department of Finance, Indian Institute of Management, Udaipur, India;2. Indira Gandhi Institute of Development Research, Mumbai, India |
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Abstract: | This paper revisits the role of leverage in price discovery, using one of the most liquid single-stock futures (SSFs) markets in the world. Price discovery is analysed as a dynamic intraday process. We find that the information share of the SSFs is 55% during news arrivals. It increases to 61%, when the news is negative and the futures is preferred because of short-sales restrictions on the spot. A partial equilibrium analysis predicts that the trade-off between leverage and market liquidity determines price discovery across securities. These predictions are validated by empirical evidence. |
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Keywords: | funding constraints information arrival leverage liquidity single-stock futures |
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