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The effect of universal futures on opening and closing stock market price discovery

Author

Listed:
  • Patricia L. Chelley‐Steeley
  • James M. Steeley

Abstract

Purpose - On 29 January 2001, Euronext LIFFE introduced single security futures contracts on a range of global companies. The purpose of this paper is to examine the impact that the introduction of these futures contracts had on the behaviour of opening and closing UK equity returns. Design/methodology/approach - The paper models the price discovery process using the Amihud and Mendelson partial adjustment model which can be estimated using a Kalman filter. Findings - Empirical results show that during the pre‐futures period both opening and closing returns under‐react to new information. After the introduction of futures contracts opening returns over‐react. A rise in the partial adjustment coefficient also takes place for closing returns but this is not large enough to cause over‐reaction. Originality/value - This is the first study to examine the impact of a single security futures contract on the speed of spot market price discovery.

Suggested Citation

  • Patricia L. Chelley‐Steeley & James M. Steeley, 2011. "The effect of universal futures on opening and closing stock market price discovery," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 28(4), pages 260-281, October.
    • Handle: RePEc:eme:sefpps:v:28:y:2011:i:4:p:260-281
    DOI: 10.1108/10867371111171537
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    References listed on IDEAS

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    1. Brad Baldauf & G. J. Santoni, 1991. "Stock price volatility: Some evidence from an ARCH model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 11(2), pages 191-200, April.
    2. Amihud, Yakov & Mendelson, Haim, 1987. "Trading Mechanisms and Stock Returns: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 42(3), pages 533-553, July.
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