Exchange Traded Contracts for Difference: Design, Pricing and Effects

58 Pages Posted: 18 Jun 2009 Last revised: 24 Jul 2009

See all articles by Christine A. Brown

Christine A. Brown

Department of Banking and Finance; Financial Research Network (FIRN)

Jonathan Dark

University of Melbourne; Financial Research Network (FIRN)

Kevin Thomas Davis

University of Melbourne - Department of Finance; Australian Centre for Financial Studies

Date Written: June 11, 2009

Abstract

Contracts for Difference (CFDs) represent a significant financial innovation in the design of futures contract. Their use in over-the-counter markets has grown significantly and has created controversy in the UK, but to date there have been no published academic studies examining CFD markets. In 2007, the Australian Securities Exchange (ASX) introduced exchange-traded CFDs on individual stocks and other financial instruments. This paper analyzes the contract design and consequences for pricing relationships between CFDs and the underlying stocks. Using the unique database of ASX CFD trades and quotes, we test empirically whether the pricing relationship conforms to theoretical expectations, how spreads in the derivative market are related to those in the physical market, and draw out implications for successful design and trading arrangements for the introduction of new derivative contracts.

Keywords: Contracts for Difference, CFDs, futures, Bid-Ask Spreads, arbitrage

JEL Classification: G13, G14

Suggested Citation

Brown, Christine A. and Dark, Jonathan and Davis, Kevin Thomas, Exchange Traded Contracts for Difference: Design, Pricing and Effects (June 11, 2009). Available at SSRN: https://ssrn.com/abstract=1420704 or http://dx.doi.org/10.2139/ssrn.1420704

Christine A. Brown

Department of Banking and Finance ( email )

Building 11E
Clayton, Victoria 3800
Australia
+61 3 99031793 (Phone)
+61 3 99055475 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: www.firn.org.au

Jonathan Dark

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kevin Thomas Davis (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Business and Economics
Parkville, Victoria 3010 3010
Australia
+613 8344 5098 (Phone)
+613 8344 6914 (Fax)

Australian Centre for Financial Studies ( email )

Level 46, 525 Collins St
Melbourne, Victoria 3079
Australia

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