Insider trading and information revelation with the introduction of futures markets

Chih-Hsiang Hsu and Hsiu-Chuan Lee

Economic Modelling, 2014, vol. 43, issue C, 173-182

Abstract: We establish a theoretical model with informed trading in which both of individual stock futures and its underlying stock are traded in the market. With the introduction of the futures, the paper shows that an informed trader's position of futures usually motivates him or her to trade more aggressively in the stock market at the expiration day. This also worsens the adverse selection problem and makes the stock market become less liquid. Moreover, the increase of the informed trading accelerates the information revelation and improves market efficiency on the expiration date. Finally, our results suggest that price manipulation could be one factor that affects the market liquidity and market efficiency when the futures are introduced into the market.

Keywords: Informed trading; Stock futures; Market efficiency; Information revelation (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:43:y:2014:i:c:p:173-182

DOI: 10.1016/j.econmod.2014.07.037

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