When Do Stock Futures Dominate Price Discovery?
Indira Gandhi Institute of Development Research
Indira Gandhi Institute of Development Research (IGIDR)
August 24, 2011
24th Australasian Finance and Banking Conference 2011 Paper
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.
Number of Pages in PDF File: 37
Keywords: Price discovery, Single stock futures, Liquidity, Leverage, Information arrival
JEL Classification: G12, G14
Date posted: August 24, 2011 ; Last revised: March 22, 2013