When stock futures dominate price discovery

Susan Thomas, Nidhi Aggarwal

This paper revisits the role of leverage in price discovery, using one of the most liquid single stock futures markets in the world. Price discovery is analysed as a dynamic intra-day process. We find that the information share of the single stock futures is 55 percent during news arrivals. It increases to 61 percent, when the news is negative and the futures is preferred because of short-sales restrictions on the spot. A partial equilibrium analysis predicts that the trade-off between leverage and market liquidity determines price discovery across securities. These predictions are validated by empirical evidence.

Citation: When stock futures dominate price discovery, Nidhi Aggarwal and Susan Thomas. Journal of Futures Markets, Volume 39, Number 3, March 2019.


Reproducible research

  • This paper uses the function pdshare to compute the Hasbrouck (1995) Information Share measure.