Premium
Effects of Futures Trading on the Spot Market Bid–Ask Spread
Author(s) -
Gerber Silvia,
Simmons Peter
Publication year - 1998
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00090
Subject(s) - futures contract , spot market , spot contract , bid price , ask price , normal backwardation , economics , financial economics , arbitrage , futures market , bid–ask spread , forward market , asset (computer security) , spread trade , econometrics , business , monetary economics , finance , market liquidity , computer science , electricity , corporate governance , open end fund , computer security , institutional investor , electrical engineering , engineering
We analyse how the presence of a futures market gives risk‐averse dealers in the spot asset opportunities for arbitrage that reduce the spot market bid–ask spread through reducing the dealers’ risk exposure. In particular if the spot and futures risks are perfectly correlated then the spot bid–ask spread is zero in equilibrium and all spot dealer risk can be diversified away. We also analyse the equilibrium futures price in this two‐market scenario.