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Developing Price Discovery Measures Within a Volatility-Based Model (Third Draft)

26 Pages Posted: 9 Nov 2011 Last revised: 13 Oct 2013

Guangli Lu

Louisiana State University

Date Written: 10 26, 2012

Abstract

I propose a model to uniquely and dynamically estimate a market’s information share. My model can also recover short run information flow’s effect on information share. After accounting for that effect, I propose a method to estimate the portion of information to which a market first reacts. The market that reacts quickly may not interpret well, as found in the subsequent study on Chinese stock index and index futures markets. The outcome suggests a dual role of liquidity. While high liquidity makes the futures market react faster to most of the information (62.5%), it also makes the futures prices noisier, and lower its contribution to information interpretation (34.4%).

Keywords: price discovery, unique information share, time dependent information share, volatility spillover adjusted information share

JEL Classification: C32, C51, G13, G14

Suggested Citation

Lu, Guangli, Developing Price Discovery Measures Within a Volatility-Based Model (Third Draft) (10 26, 2012). Available at SSRN: https://ssrn.com/abstract=1957078 or http://dx.doi.org/10.2139/ssrn.1957078

Guangli Lu (Contact Author)

Louisiana State University ( email )

Business Complex, 2326
Baton Rouge, LA 70802
United States

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