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When Do Stock Futures Dominate Price Discovery?

37 Pages Posted: 24 Aug 2011 Last revised: 22 Mar 2013

Nidhi Aggarwal

Indira Gandhi Institute of Development Research

Susan Thomas

Indira Gandhi Institute of Development Research (IGIDR)

Date Written: August 24, 2011

Abstract

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

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

Nidhi Aggarwal (Contact Author)

Indira Gandhi Institute of Development Research ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Mumbai, Maharashtra 400065
India

Susan Thomas

Indira Gandhi Institute of Development Research (IGIDR) ( email )

Gen A.K. Vaidya Marg Santoshnagar
Goregaon (East)
Bombay 400065, Maharashtra
India
22-840-0919, ext 550 (Phone)
22-840-2752 (Fax)

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