Interaction Between Single-Stock Futures and the Underlying Securities: A Cross-Country Analysis

Abstract

We investigate the price discovery mechanism among the single-stock futures (SSFs) and underlying stock markets in four emerging organized markets: India, Korea, Poland, and Russia. We find that the contribution of the SSF market to price discovery is, on average, 47 percent when utilizing daily data and 36 percent when utilizing intraday data. We further find that according to our cross-sectional analysis, spot market turnover, spot market capitalization, and age of the futures contract affect the role of SSF in the price discovery process.

KEY WORDS:

• emerging markets
• price discovery
• single-stock futures

Acknowledgments

The authors are grateful to the anonymous referee(s) for constructive comments/suggestions that significantly improved this article. The views expressed in this work are those of the authors and do not necessarily reflect those of Borsa İstanbul or its members.

Notes

1. From “Statistics definitions and examples” of the World Federation of Exchanges (available at http://www.world-exchanges.org/files/files/file/Stats_definitions_2013.pdf).

2. World Federation of Exchanges Statistics (available at http://www.world-exchanges.org/statistics/monthly-reports).

3. OneChicago is an equity finance exchange providing a marketplace for trading security futures including single stock futures (SSFs) (http://www.onechicago.com).

4. The tables of ADF test results and Johansen cointegration test results are not presented here for the sake of brevity. The tables can be provided by the authors upon request.

5. The contribution of the futures market to price discovery is 45.8 percent when Russia is excluded.

6. The Moscow Exchange is the only exchange (in the sample) in which physical delivery is the type of settlement method utilized.

7. We were able to obtain intraday data for this period. We were not able to find data for thirty-one pairs that were included in the daily analysis; therefore, our sample decreases from 196 to 165. Specifically, we were unable to obtain intraday data for any of the pairs traded in Russia.