Price discovery in spot and futures markets: A reconsideration

Erik Theissen

No 2009/27, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We reconsider the issue of price discovery in spot and futures markets. We use a threshold error correction model to allow for arbitrage operations to have an impact on the return dynamics. We estimate the model using quote midpoints, and we modify the model to account for time-varying transaction costs. We find that the futures market leads in the process of price discovery. The lead of the futures market is more pronounced in the presence of arbitrage signals. Thus, when the deviation between the spot and the futures market is large, the spot market tends to adjust to the futures market.

Keywords: Futures Markets; Threshold Error Correction; Information Shares; Common Factor Weights (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Date: 2009
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Related works:
Journal Article: Price discovery in spot and futures markets: a reconsideration (2012)
Working Paper: Price discovery in spot and futures markets: A reconsideration (2011)
Working Paper: Price discovery in spot and futures markets: A reconsideration (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200927

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