Spot and Forward Prices in the Brussels SE: Time Value v. Convenience Premiums

34 Pages Posted: 16 Feb 2009

See all articles by Thi Ngoc Tuan Bui

Thi Ngoc Tuan Bui

Katholieke Universiteit Leuven

Piet Sercu

FEB at KU Leuven

Date Written: February 16, 2009


Until the mid-90s, the more active among the Brussels-listed stocks were traded in two parallel segments: "spot'' (that is, with (t 3) settlement) and "forward'' (periodic settlement at the end of a two- or three-week period). In this paper we study the opening prices from the angle of what drives the observed forward premiums. We test whether forward premiums are related to time to settlement and interest rates, and, if not, whether they seem to reflect extra costs (or shadow costs) of running out of either cash balances or long stock positions.

The settlement effect is tested in each market separately and then on cross-market price differences. In spot markets there is very little evidence in favor or against a settlement effect, perhaps because the time value item has a very small variability. As expected, the time value signals are somewhat stronger in forward prices and noticeably so in forward premiums, but the estimates remain below our theoretical priors.

Next, we show theoretically that a positive forward premium is more likely in a situation in which the order volume from cash-constrained buyers exceeds that of sellers without a long position. Likewise, a negative forward premium typically means that the order volume from sellers without long positions exceeds that of cash-constrained buyers. We find that abnormally high forward premiums are 2.5-3 times more frequent and larger than negative premiums, and that they persist in time, unlike negative premiums. Thus, contrary to what many academics may have expected, getting money loans seems to be a more frequent, more expensive, and more persistent problem than asset borrowing.

Keywords: dual markets, settlement effect, market microstructure

JEL Classification: G14, G15

Suggested Citation

Bui, Thi Ngoc Tuan and Sercu, Piet M. F. A., Spot and Forward Prices in the Brussels SE: Time Value v. Convenience Premiums (February 16, 2009). Available at SSRN: or

Thi Ngoc Tuan Bui (Contact Author)

Katholieke Universiteit Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

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