Trading costs and price discovery |
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Authors: | Siu-Kai Choy Hua Zhang |
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Affiliation: | (1) Joseph L. Rotman School of Management, University of Toronto, 105 St. Gorge Street, Toronto, ON, M5S 3E6, Canada;(2) Department of Finance, The Chinese University of Hong Kong, Shatin, NT, Hong Kong |
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Abstract: | The price discovery roles of a set of related markets or securities have been investigated in many different settings where trading costs effect is often commingled with other trading arrangement factors. In Hong Kong, regular futures and mini futures contracts as well as their underlying spot asset are all traded on a same electronic trading platform. The trading arrangements thus provide us with a unique setting where we can isolate the impacts of transaction costs on price discovery. Using Hasbrouck’s (J Finance 50:1175–1199, 1995) information share approach, it is found that in Hong Kong, the regular futures contracts market plays a dominant role in price discovery while the mini futures and cash index markets play minor roles. The results in this paper provide an unequivocal support to the trading costs hypothesis. |
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