When stock futures dominate price discovery | Zendy

Aggarwal Nidhi | Zendy; Thomas Susan | Zendy

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When stock futures dominate price discovery

Author(s) -

Aggarwal Nidhi,

Thomas Susan

Publication year - 2019

Publication title -

journal of futures markets

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.88

H-Index - 55

eISSN - 1096-9934

pISSN - 0270-7314

DOI - 10.1002/fut.21973

Subject(s) - price discovery , futures contract , leverage (statistics) , market liquidity , financial economics , economics , stock (firearms) , futures market , econometrics , monetary economics , computer science , mechanical engineering , machine learning , engineering

This paper revisits the role of leverage in price discovery, using one of the most liquid single‐stock futures (SSFs) markets in the world. Price discovery is analysed as a dynamic intraday process. We find that the information share of the SSFs is 55% during news arrivals. It increases to 61%, when the news is negative and the futures is preferred because of short‐sales restrictions on the spot. A partial equilibrium analysis predicts that the trade‐off between leverage and market liquidity determines price discovery across securities. These predictions are validated by empirical evidence.

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