A structural analysis of price discovery measures

Yan, Bingcheng; Zivot, Eric

doi:10.1016/j.finmar.2009.09.003

Cited by 201 publications

(83 citation statements)

References 39 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…All measures of price discovery have been discussed in a brief manner, but interested readers may refer to the original articles. These methods have been discussed and compared in a detailed manner by several studies (Baillie et al, 2002;Lehmann, 2002;Putniņš, 2013;Yan and Zivot, 2010). The first measure is CS measure, which is based on the permanent-transitory decomposition proposed by Gonzalo and Granger (1995).…”

Section: Methodsmentioning

confidence: 99%

Price discovery in Indian stock index futures market: new evidence based on intraday data

Inani

2017

IJICBM

View full text Add to dashboard Cite

This study revisits price discovery process in Indian stock index futures market for spot and futures of S&P CNX Nifty, by using high-frequency one-minute time-interval data for the period from January 2011 to August 2015 to gain fresh insights. Stationarity and cointegration tests reveal that spot and futures prices are I (1) and cointegrated. Three different econometric methodologies -component share method of Gonzalo and Granger (1995), information share method of Hasbrouck (1995), and modified information share of Lien and Shrestha (2009) have been employed to determine the extent of price discovery contribution by spot and futures markets. The results reveal that futures market is performing its price discovery function which satisfies the transaction cost hypothesis. Also, these results support the notion that futures market is more efficient vis-à-vis spot market in India. Price discovery is a main function of futures market and has implications for asset pricing, portfolio allocation, investment strategy formation, and market efficiency. This study might be helpful for regulators and policymakers to form market structure policies and guidelines for equity markets.

show abstract

Section: Methodsmentioning

confidence: 99%

Price discovery in Indian stock index futures market: new evidence based on intraday data

Inani

2017

IJICBM

View full text Add to dashboard Cite

show abstract

“…First, as Yan and Zivot (2007) show, the Cholesky decomposition introduces transitory shocks to IS. Second, the exogeneity/endogeneity of the variables in a VECM system can introduce a computational problem.…”

Section: Empirical Proceduresmentioning

confidence: 95%

“…Several papers examine the price discovery process, which is usually defined as "the dynamic process by which market prices incorporate new information" -see Yan and Zivot (2007). The main object of the price discovery analysis is to identify the primary venue where efficient price innovations occur.…”

Section: The Role Of the Option Market In Price Discoverymentioning

confidence: 99%

See 1 more Smart Citation

Price Discovery in Stock and Option Markets: A Portfolio Approach

Hwang

Susmel

2009

SSRN Journal

View full text Add to dashboard Cite

In this paper, we propose a new portfolio approach to estimate Hasbrouck's (1995) information share (IS), which measures the relative contribution of one market to the variance of an efficient stock return process. Using GMM, we are able to estimate optimal weights for a portfolio of options to be used in Hasbrouck's (1995) analysis. With our dataset, IS of the option market using only ATM call options lies between 31% and 46%, while IS using a portfolio of options lies between 47% and 58%, a statistically significant increase. This finding indicates that using only one type of options, as often done in the literature, may result in an underestimated measure. We also find that as we increase the resolution of the data from 30 seconds to 15 minutes, the weight of OTM options in a portfolio increases from 18% to 32%. This result shows that the OTM option market's information takes time to be incorporated into stock prices since the information travels across stock and option markets.Keywords: Price discovery, Information share, efficient stock prices, GMM JEL Classification: G14, C52 * We would like to thank Tom George and Praveen Kumar for helpful comments. 2 Price Discovery in Stock and Option Markets:A Portfolio Approach AbstractIn this paper, we propose a new portfolio approach to estimate Hasbrouck's (1995) information share (IS), which measures the relative contribution of one market to the variance of an efficient stock return process. Using GMM, we are able to estimate optimal weights for a portfolio of options to be used in Hasbrouck's (1995) analysis. With our dataset, IS of the option market using only ATM call options lies between 31% and 46%, while IS using a portfolio of options lies between 47% and 58%, a statistically significant increase. This finding indicates that using only one type of options, as often done in the literature, may result in an underestimated measure. We also find that as we increase the resolution of the data from 30 seconds to 15 minutes, the weight of OTM options in a portfolio increases from 18% to 32%. This result shows that the OTM option market's information takes time to be incorporated into stock prices since the information travels across stock and option markets.3

show abstract

“…Under the same framework, the Component Share (CS), 4 an alternative price discovery metric, has been proposed based on Gonzalo & Granger's (1995) separation between transitory and permanent components. More recently, Yan and Zivot (2010) recommended a combination of both measures to form the Information Leadership Share (ILS). The ILS is a dynamic measure of relative market efficiency, based on a structural model of Yan and Zivot (2007) that addresses two main drawbacks of the previous two measures: they are based on reduced-form representations, and they are static in nature.…”

Section: Related Workmentioning

confidence: 99%

Price Discovery in Brazilian FX Markets

Santos

García

Medeiros

2015

Brazilian Review of Econometrics

View full text Add to dashboard Cite

We study price discovery in the Brazilian Foreign Exchange (FX) markets and indicate which market (spot or futures) adjusts more quickly to the arrival of new information. We find that the futures market dominates price discovery since it accounts for 66.2% of the variation in the fundamental price shock and 97.4% of the fundamental price composition. This corroborates results from previous studies that, in a unique world example, the exchange rate is formed in the futures market. In a dynamic perspective, the futures market is also more efficient since equilibrium is more quickly restored when markets are subjected to a shock in the fundamental price. By computing price discovery according to calendar semesters, we find evidence of the correlation between price discovery metrics and market factors, such as spot market supply-demand disequilibrium, central bank interventions, and institutional investors' pressure.

show abstract

A structural analysis of price discovery measures

Cited by 201 publications

References 39 publications

Price discovery in Indian stock index futures market: new evidence based on intraday data

Price discovery in Indian stock index futures market: new evidence based on intraday data

Price Discovery in Stock and Option Markets: A Portfolio Approach

Price Discovery in Brazilian FX Markets

Contact Info

Product

Resources

About