Price Discovery Between Informationally Linked Markets During Different Trading Phases

Allan Hodgson, Abul Masih and Rumi Masih

Journal of Financial Research, 2003, vol. 26, issue 1, 77-95

Abstract: The dynamic nature of the price information transfer when stock and futures markets switch between different price trading phases is examined. This is undertaken by decomposing Australian stock indexes and share price index futures contract data into bear‐ and bull‐market phases and analyzing the change in the power of the bidirectional information feedback between the futures market and small, medium, and large stocks. Results support the hypothesis that the nature of the price‐discovery process varies with the trading phase. In particular, during the bull phase small stocks show a marked increase in price exogeneity and futures prices contain relatively less price‐sensitive fundamental information. We argue that in bull phases, futures trading becomes increasingly associated with noninformation trading such as realizing paper profits, portfolio rebalancing, and increased noise trading.

Date: 2003
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