When stock futures dominate price discovery


Susan Thomas, Nidhi Aggarwal


While the literature on price discovery attributes a weak role to single stock derivatives, this paper shows that single stock futures can dominate price discovery, with their information share rising to 55 percent when news arrives. The increase is larger for negative news where traders face restrictions on short-selling the spot. A partial equilibrium analysis predicts traders choose between the benefits of leverage and market liquidity, and these predictions are validated by an empirical panel analysis. The paper suggests that traders choose leverage to trade information and to preserve the efficiency of trading capital.

Citation: When stock futures dominate price discovery, Susan Thomas, Nidhi Aggarwal. IGIDR Working paper WP-2011-016, June 2013.

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