Intraday Price Discovery in the DJIA Index Markets

Yiuman Tse, Paramita Bandyopadhyay and Yang‐Pin Shen

Journal of Business Finance & Accounting, 2006, vol. 33, issue 9‐10, 1572-1585

Abstract: Abstract: This paper explores the dynamics of price discovery between the Dow Jones Industrial Average (DJIA) index and its three derivative products: the DIAMOND exchange‐traded fund (ETF), the floor‐traded regular futures, and the electronically traded mini futures. Even though the American Stock Exchange is the primary listing exchange for the ETF, the analysis indicates that the electronically traded ETF on the Archipelago (ArcaEx) electronic communications network dominates the price discovery process for DIAMOND shares. The E‐mini futures contribute the most to price discovery, followed by the ArcaEx DIAMOND. The DJIA index and regular futures contribute least to price discovery. The analysis is repeated using the derivatives of the S&P 500 index as a robustness check. The results indicate that multi‐market trading ensures greater pricing efficiency. Informed traders favor electronic trading because of immediate and anonymous trade execution.

Date: 2006
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