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Settlement procedures and stock market efficiency

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  • Emily Lin
  • Carl R. Chen

Abstract

This study examines why most derivatives markets that settle on the day following expiration choose the opening rather than the closing price as the final settlement price (FSP), whereas most markets that settle on the expiration day select an average rather than a single price as the FSP. Four exogenous changes in the Taiwan Futures Exchange settlement procedures provide an experimental basis for studying the settlement procedures’ impact on underlying assets. Greatest market efficiency is observed when the FSP is determined by a single rather than an average price and hypothesize that manipulation is prevented at the expense of market quality.

Suggested Citation

  • Emily Lin & Carl R. Chen, 2019. "Settlement procedures and stock market efficiency," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(2), pages 164-185, February.
    • Handle: RePEc:wly:jfutmk:v:39:y:2019:i:2:p:164-185
    DOI: 10.1002/fut.21977
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