Price discovery in the foreign exchange futures market

Abstract

Examination is made of the relative contributions to price discovery of the floor and electronically traded euro FX and Japanese yen futures markets and the corresponding retail on-line foreign exchange spot markets. GLOBEX electronic futures contracts provide the most price discovery in the euro; the on-line trading spot market provides the most in the Japanese yen. The floor-traded futures markets contribute the least to price discovery in both the euro and the Japanese yen markets. The overall results show that electronic trading platforms facilitate price discovery more efficiently than floor trading. Futures traders may also extract information from on-line spot prices.

News announcements and price discovery in foreign exchange spot and futures markets

“…Results based on both the Hasbrouck information share and the Granger-Gonzalo common factor weight show that the EBS spot market contributes more to price discovery than do the CME futures markets for both the JPY-USD and EUR-USD exchanges, consistent with Cabrera et al (2009). 4 Our finding differs from the conclusions of Crain and Lee (1995), Chatrath and Song (1998), Martens and Kofman (1998), Rosenberg and Traub (2009), and Tse et al (2006), all of whom argue that FX futures rates contribute more to price discovery than do the spot rates. 5 This conflict may reflect the enhanced price efficiency in EBS trading (Ito and Hashimoto, 2006), which has a larger market share, more liquidity, and greater transparency than other trading venues for spot FX rates.…”

“…Rosenberg and Traub (2009) use Reuters D2000-1 spot rates and conclude that the FX futures market offers more of a contribution to price discovery than does the spot market. Tse et al (2006) estimate the relative contribution of the CME floor-traded (via open outcry) futures prices, electronic GLOBEX futures prices, and electronic retail online CMC spot quotes in the euro/dollar and Japanese yen/dollar markets; the GLOBEX futures prices provide the best price discovery for the euro. Our results may differ from those of Tse et al (2006) because the EBS data we use have a higher market share in the FX market than CMC retail online trading.…”

“…That is, the level of transparency in the FX spot market is lower, and the exchange rate may respond more slowly to information related to fundamentals, in contrast with the FX futures market on the Chicago Mercantile Exchange (CME). Crain and Lee (1995), Chatrath and Song (1998), Martens and Kofman (1998), Rosenberg and Traub (2009), and Tse et al (2006) reveal that the FX futures market contributes more to price discovery than does the spot market.…”

Speculation and hedging in the currency futures markets: Are they informative to the spot exchange rates

“…Thus, arbitrage 1 Recent literature has documented lead-lag relationships between spot rates and futures prices. Cabrera, Wang, and Yang, (2009), Chen and Gau (2010), and Rosenberg and Traub (2009), for example, show that the spot foreign exchange markets lead the price discovery while Tse, Xiang, and Fung (2006) find opposite evidence. Nevertheless, the lead-lag effect found in these studies on the basis of high-frequency data (e.g.…”

Time Disparity and Price Discovery: The Effect of the U.S. Futures on Korean Gold Market

“…As stated in Chan (1992), Lee and Lim (2002), Tse et al (2006), and Yeom and Baek (2015), it is commonly accepted that the futures exchange market is leading the spot market. Barry et al (2003) also suggests that the large price reversals in the U.S. gold and silver futures market tend to occur on days with lower trading volume and days with a sharp change in trading volume from the prior day.…”