37 Pages Posted: 24 Aug 2011 Last revised: 22 Mar 2013
Date Written: August 24, 2011
Contrary to the weak role of single stock derivatives found in the price discovery literature, this paper finds that single stock futures (SSF) traded on a liquid exchange have a high average information share of 49 percent, which increases by six percentage points upon information arrival. A partial equilibrium analysis shows that the choice of trading venue depends on the tradeoff between the benefits of leverage versus differences in liquidity of the two markets. Predictions about cross-sectional variations in the price discovery are validated by the empirical analysis, but only the liquidity difference influences this variation during information arrival.
Keywords: Price discovery, Single stock futures, Liquidity, Leverage, Information arrival
JEL Classification: G12, G14
Suggested Citation: Suggested Citation
Aggarwal, Nidhi and Thomas, Susan, When Do Stock Futures Dominate Price Discovery? (August 24, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1916072 or http://dx.doi.org/10.2139/ssrn.1916072