Price discovery in the German equity index derivatives markets

108

/ SummaryThe market for US equity indexes has traditionally comprised floor-traded index futures contracts and the individual markets for the component stocks. This picture has been altered by the advent of exchange-traded funds (ETFs) that mirror the indexes, electronically-traded, small-denomination ("E-mini") futures contracts, and (for the S&P 500) a family of sector ETFs that break the index into nine components. This paper empirically investigates price discovery (price leadership) in this new environment. The specifications are estimated at very fine (up to one second) time resolution. The principal findings are as follows.• For the S&P 500 and Nasdaq-100 indexes, the index market comprises an ETF, a regular floor-traded futures contract and an E-mini futures contract. The paper finds that most of the price discovery for both indexes occurs in the E-mini markets: price changes in the E-mini futures prices generally lead those in the regular futures contracts and the ETFs.• The market in the S&P 400 MidCap index comprises only the ETF and the regular futures contract. Both securities contribute substantially to price discovery, but the ETF appears to dominate.• The sector ETFs can closely replicate the S&P 500 ETF. Nevertheless, trading activity across the sector ETFs varies considerably. The most actively traded sector (technology) contributes a modest amount to price discovery in the overall index. The other sector ETFs play only a minor role.

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confidence: 99%

Section: "Nonsynchronous" Pricesmentioning

confidence: 99%

Intraday Price Formation in US Equity Index Markets

Hasbrouck

2001

108

“…The approach by Gonzalo & Granger (1995), which was introduced into finance by Booth, So & Tse (1999), does not suffer from this problem as the contributions of each market are uniquely defined. They decompose transaction prices into a permanent component, which is integrated of order 1, and a transitory component that is stationary.…”

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confidence: 99%

“…We measure the contributions of trading on the spot and futures markets to price discovery using the information shares approach by Hasbrouck (1995) and a factor weight based on the Gonzalo-Granger decomposition first applied to financial markets by Booth, So & Tse (1999). Both methods are based on a vector error correction model (VECM) and allow to separate long-run based price movements based on information from short-run microstructure noise like bid-ask bounce.…”

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confidence: 99%

The Tail Wags the Dog: Time-Varying Information Shares in the Bund Market

Upper

Werner

2007

The flow of information between futures and spot prices may vary over time, in particular during periods of stress. This article analyses the information content of the Bund Future and German government bonds during 1998 and test whether it is constant over time. The use of high-frequency data permits us to capture possible imperfections in the information flows between the two markets. We measure the contributions of trading on the spot and futures markets to price discovery using the information shares approach by Hasbrouck (1995) as well as a recently proposed approach based on the Gonzalo-Granger decomposition. A state-space approach is used to estimate the underlying VECM in the presence of missing values. We test for structural breaks in the pricing relationship between the spot and futures markets and estimate break dates. Although most information is incorporated into prices in the futures market, this does not mean that the spot market is irrelevant for prices discovery. Under normal market conditions, the underlying bonds contribute to 19 to 33 % of the variation in the efficient price. The informational role of the spot market vanishes during episodes of stress. For example, during the two weeks after

“…Booth, So and Tse (1999), Baillie et al (2002), Harris et al (2002). These two models complement each other and provide different views of the price discovery process between markets.…”

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confidence: 99%

Price Discovery in the Dual-Platform US Treasury Market

Dunne

Sun

2011

Inter-dealer trading in US Treasury securities is almost equally divided between two electronic trading platforms that have only slight differences in terms of their relative liquidity and transparency. BrokerTec is more active in the trading of 2-, 5-, and 10-year T-notes while eSpeed has more active trading in the 30-year bond. Over the period studied, eSpeed provides a more pre-trade transparent platform than BrokerTec. We examine the contribution to 'price discovery' of activity in the two platforms using high frequency data. We find that price discovery does not derive equally from the two platforms and that the shares vary across term to maturity. This can be traced to differential trading activities and transparency of the two platforms.Keywords: Microstructure; Treasury market; Bid-ask spread; Price discovery JEL classification: G10; G12; G14; D4; C32 Price Discovery in the Dual-Platform US Treasury Market AbstractInter-dealer trading in US Treasury securities is almost equally divided between two electronic trading platforms that have only slight differences in terms of their relative liquidity and transparency. BrokerTec is more active in the trading of 2-, 5-, and 10-year T-notes while eSpeed has more active trading in the 30-year bond. Over the period studied, eSpeed provides a more pre-trade transparent platform than BrokerTec. We examine the contribution to 'price discovery' of activity in the two platforms using high frequency data. We find that price discovery does not derive equally from the two platforms and that the shares vary across term to maturity. This can be traced to differential trading activities and transparency of the two platforms.