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The effect of universal futures on opening and closing stock market price discovery

The effect of universal futures on opening and closing stock market price discovery Purpose – On 29 January 2001, Euronext LIFFE introduced single security futures contracts on a range of global companies. The purpose of this paper is to examine the impact that the introduction of these futures contracts had on the behaviour of opening and closing UK equity returns. Design/methodology/approach – The paper models the price discovery process using the Amihud and Mendelson partial adjustment model which can be estimated using a Kalman filter. Findings – Empirical results show that during the pre‐futures period both opening and closing returns under‐react to new information. After the introduction of futures contracts opening returns over‐react. A rise in the partial adjustment coefficient also takes place for closing returns but this is not large enough to cause over‐reaction. Originality/value – This is the first study to examine the impact of a single security futures contract on the speed of spot market price discovery. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Studies in Economics and Finance Emerald Publishing

The effect of universal futures on opening and closing stock market price discovery

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References (36)

Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1086-7376
DOI
10.1108/10867371111171537
Publisher site
See Article on Publisher Site

Abstract

Purpose – On 29 January 2001, Euronext LIFFE introduced single security futures contracts on a range of global companies. The purpose of this paper is to examine the impact that the introduction of these futures contracts had on the behaviour of opening and closing UK equity returns. Design/methodology/approach – The paper models the price discovery process using the Amihud and Mendelson partial adjustment model which can be estimated using a Kalman filter. Findings – Empirical results show that during the pre‐futures period both opening and closing returns under‐react to new information. After the introduction of futures contracts opening returns over‐react. A rise in the partial adjustment coefficient also takes place for closing returns but this is not large enough to cause over‐reaction. Originality/value – This is the first study to examine the impact of a single security futures contract on the speed of spot market price discovery.

Journal

Studies in Economics and Finance – Emerald Publishing

Published: Oct 4, 2011

Keywords: Single security futures; Price discovery; Universal futures; Market openings and closings; Stock markets; United Kingdom

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