Price Discovery and Liquidity in Basket Securities

21 Pages Posted: 2 Apr 2008

See all articles by Thomas Henker

Thomas Henker

Bond University

Martin Martens

Erasmus University Rotterdam (EUR); Robeco Asset Management


Basket securities enable investors to purchase a broad portfolio of securities in a single transaction. We examine the link between HOLDRS, a basket security comprising stocks from an industry or sector, and the underlying stocks. We find that the price of the portfolio of underlying securities leads and is more informative than the basket price. Our results are contrary to the findings of empirical studies that use futures, which are basket securities with features less like those of the underlying equities. Our findings suggest uninformed investors can minimize adverse selection costs by trading basket securities rather than the underlying stocks.

Suggested Citation

Henker, Thomas and Martens, Martin P.E., Price Discovery and Liquidity in Basket Securities. Financial Review, Vol. 43, Issue 2, pp. 219-239, May 2008. Available at SSRN: or

Thomas Henker (Contact Author)

Bond University ( email )

Gold Coast, QLD 4229
+61 7 5595-1561 (Phone)

Martin P.E. Martens

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam
+31 10 408 1253 (Phone)
+31 10 408 9162 (Fax)

Robeco Asset Management ( email )

Rotterdam, 3011 AG

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