Price discovery of German index derivatives during financial turmoil

Anja Frommherz ()
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Anja Frommherz: University of Basel

Review of Managerial Science, 2019, vol. 13, issue 1, No 6, 147-179

Abstract: Abstract According to basic finance theory, a derivative’s price is derived from the value of its underlying asset and therefore incorporates the same informational content as the fundamental. Empirically however, this prediction can often be refuted due to liquidity and trading cost aspects. Using a unique high-frequency data set, this paper studies the price formation of the German equity index market, the DAX, in a multivariate framework and breaks it down into its four main market segments. For the period under consideration from July 2007 to December 2009, which is characterized by severe financial turmoil, I find that the futures market leads in terms of price discovery, closely followed by the exchange-traded fund. Further, the time series behavior of the information share measures clearly suggests a sensitivity towards the market environment. I show that the informational contribution to price discovery is affected by the financial crisis and that short-selling constraints weaken the price discovery role of certain markets.

Keywords: Price discovery; Index futures; Index options; ETF; Information share; Financial crisis 2008–2009 (search for similar items in EconPapers)
JEL-codes: G01 G13 G14 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11846-017-0241-4

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