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Time-varying price discovery in fragmented markets

Nick Taylor ()

Applied Financial Economics, 2011, vol. 21, issue 10, 717-734

Abstract: This article examines temporal aspects of the price discover process in the (fragmented) Standard & Poor's (S&P) 500 market. This is achieved by augmenting the coefficients in the model upon which the price discovery measures are based, by a set of time-varying (theoretically-implied) scaling factors. The factors considered can be characterized as those that measure market liquidity and those that measure the degree of information asymmetry that exists at a particular time. Regarding the latter measures, this feature of financial markets is assessed by considering, inter alia, price discovery around the release of key macroeconomic information. Using high-frequency data from five constituent S&P 500 index markets, the results provide two main insights into price discovery in this fragmented market. First, the majority of price discovery appears to occur in the market for the individual stocks making up the index and in the (electronically traded) E-mini futures market. And second, the E-mini futures market becomes the dominant price discovery market only during periods of extreme information asymmetry and when this market is liquid - a finding that supports theoretical arguments proposed in the related literature.

Date: 2011
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Handle: RePEc:taf:apfiec:v:21:y:2011:i:10:p:717-734