IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v18y2009i4p183-189.html
   My bibliography  Save this article

Information contents misjudged: Digressive convergence to equilibrium in cointegrated prices

Author

Listed:
  • Keshin Tswei
  • Jing‐yi Lai

Abstract

The spot price on the Taiwan stock index is richer in information than the futures price judged by the price discovery measures of Gonzalo and Granger [Gonzalo, J., & Granger, C.W.J. (1995). Estimation of common long‐memory components in cointegrated systems. Journal of Business and Economic Statistics, 13, 27–35.] and Hasbrouck [Hasbrouck, J. (1995). One security, many markets: Determining the contributions to price discovery. Journal of Finance, 50, 1175–1199.]. What is special about the markets is that both the spot and futures error‐correction coefficients are positive, implying a digressive convergence to their long‐run equilibrium in the error‐correction (EC) process. Innovation accounting suggests that the cause of this digressive equilibrium adjustment is that investors systematically overreact to news in the less informative futures market but under‐react to the more informative spot market. Our contribution is in identifying the digressive convergence implied by same‐sign EC coefficients, comparing it to the normal convergence widely found in opposite‐sign EC models, and providing short‐run mispricing interpretations for both types of convergence to equilibrium.

Suggested Citation

  • Keshin Tswei & Jing‐yi Lai, 2009. "Information contents misjudged: Digressive convergence to equilibrium in cointegrated prices," Review of Financial Economics, John Wiley & Sons, vol. 18(4), pages 183-189, October.
    • Handle: RePEc:wly:revfec:v:18:y:2009:i:4:p:183-189
    DOI: 10.1016/j.rfe.2008.09.002
    as

    Download full text from publisher

    File URL: https://doi.org/10.1016/j.rfe.2008.09.002
    Download Restriction: no
    File URL: https://libkey.io/10.1016/j.rfe.2008.09.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Alex Frino & Frederick H. deB. Harris & Thomas H. McInish & Michael J. Tomas III, 2004. "Price Discovery in the Pits: The Role of Market Makers on the CBOT and the Sydney Futures Exchange," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(8), pages 785-804, August.
    2. Su, Qian & Chong, Terence Tai-Leung, 2007. "Determining the contributions to price discovery for Chinese cross-listed stocks," Pacific-Basin Finance Journal, Elsevier, vol. 15(2), pages 140-153, April.
    3. Fong, Kingsley & Zurbruegg, Ralf, 2003. "How much do locals contribute to the price discovery process?," Journal of Empirical Finance, Elsevier, vol. 10(3), pages 305-320, May.
    4. de Jong, Frank, 2002. "Measures of contributions to price discovery: a comparison," Journal of Financial Markets, Elsevier, vol. 5(3), pages 323-327, July.
    5. Kate Phylaktis & Gikas Manalis, 2005. "Price transmission dynamics between informationally linked securities," Applied Financial Economics, Taylor & Francis Journals, vol. 15(3), pages 187-201.
    6. repec:bla:jfinan:v:58:y:2003:i:2:p:549-576 is not listed on IDEAS
    7. deB. Harris, Frederick H. & McInish, Thomas H. & Shoesmith, Gary L. & Wood, Robert A., 1995. "Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(4), pages 563-579, December.
    8. Vicentiu Covrig & David K. Ding & Buen Sin Low, 2004. "The contribution of a satellite market to price discovery: Evidence from the Singapore exchange," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(10), pages 981-1004, October.
    9. Theissen, Erik, 2002. "Price discovery in floor and screen trading systems," Journal of Empirical Finance, Elsevier, vol. 9(4), pages 455-474, November.
    10. Garbade, Kenneth D & Silber, William L, 1983. "Price Movements and Price Discovery in Futures and Cash Markets," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 289-297, May.
    11. Shen-Yuan Chen & Ching-Chung Lin & Pin-Huang Chou & Dar-Yeh Hwang, 2002. "A Comparison of Hedge Effectiveness and Price Discovery between TAIFEX TAIEX Index Futures and SGX MSCI Taiwan Index Futures," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 277-300.
    12. Tse, Yiuman & Lee, Tae-Hwy & Booth, G. Geoffrey, 1996. "The international transmission of information in Eurodollar futures markets: a continuously trading market hypothesis," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 447-465, June.
    13. Zhong, Maosen & Darrat, Ali F. & Otero, Rafael, 2004. "Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3037-3054, December.
    14. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    15. Hasbrouck, Joel, 1995. "One Security, Many Markets: Determining the Contributions to Price Discovery," Journal of Finance, American Finance Association, vol. 50(4), pages 1175-1199, September.
    16. Mahmoud Wahab & Malek Lashgari, 1993. "Price dynamics and error correction in stock index and stock index futures markets: A cointegration approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(7), pages 711-742, October.
    17. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," The Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 123-152.
    18. Stoll, Hans R. & Whaley, Robert E., 1990. "The Dynamics of Stock Index and Stock Index Futures Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(4), pages 441-468, December.
    19. Yiuman Tse & Grigori Erenburg, 2003. "Competition For Order Flow, Market Quality, And Price Discovery In The Nasdaq 100 Index Tracking Stock," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(3), pages 301-318, September.
    20. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    21. Cheol S. Eun & Sanjiv Sabherwal, 2003. "Cross‐Border Listings and Price Discovery: Evidence from U.S.‐Listed Canadian Stocks," Journal of Finance, American Finance Association, vol. 58(2), pages 549-575, April.
    22. Kawaller, Ira G & Koch, Paul D & Koch, Timothy W, 1987. "The Temporal Price Relationship between S&P 500 Futures and the S and P 500 Index," Journal of Finance, American Finance Association, vol. 42(5), pages 1309-1329, December.
    23. Ching-Chung Lin & Shen-Yuan Chen & Dar-Yeh Hwang & Chien-Fu Lin, 2002. "Does Index Futures Dominate Index Spot? Evidence from Taiwan Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 255-275.
    24. Harris, Frederick H. deB. & McInish, Thomas H. & Wood, Robert A., 2002. "Common factor components versus information shares: a reply," Journal of Financial Markets, Elsevier, vol. 5(3), pages 341-348, July.
    25. Kim, Ki-ho, 2003. "Dollar exchange rate and stock price: evidence from multivariate cointegration and error correction model," Review of Financial Economics, Elsevier, vol. 12(3), pages 301-313.
    26. Jeff Fleming & Barbara Ostdiek & Robert E. Whaley, 1996. "Trading costs and the relative rates of price discovery in stock, futures, and option markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(4), pages 353-387, June.
    27. Foster, Andrew J., 1996. "Price discovery in oil markets: a time varying analysis of the 1990-1991 Gulf conflict," Energy Economics, Elsevier, vol. 18(3), pages 231-246, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chun-I Lin & Kuan-Yi Chiang & Ming-Chih Lee & Yen-Hsien Lee, 2021. "The Cross-Border Price Discovery and the Shanghai-Hong Kong Stock Connect," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 11(3), pages 1-2.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tswei, Keshin & Lai, Jing-yi, 2009. "Information contents misjudged: Digressive convergence to equilibrium in cointegrated prices," Review of Financial Economics, Elsevier, vol. 18(4), pages 183-189, October.
    2. Mohammed Arshad Khan & Md. Mobashshir Hussain & Asif Pervez & Mohd Atif & Rohit Bansal & Hamad A. Alhumoudi & Miaochao Chen, 2022. "Intraday Price Discovery between Spot and Futures Markets of NIFTY 50: An Empirical Study during the Times of COVID-19," Journal of Mathematics, Hindawi, vol. 2022, pages 1-9, August.
    3. Hou, Yang & Nartea, Gilbert, 2017. "Price Discovery in the Stock Index Futures Market: Evidence from the Chinese stock market crash," MPRA Paper 81995, University Library of Munich, Germany.
    4. Kao, Chung-Wei & Wan, Jer-Yuh, 2009. "Information transmission and market interactions across the Atlantic -- an empirical study on the natural gas market," Energy Economics, Elsevier, vol. 31(1), pages 152-161, January.
    5. Yang Hou & Steven Li, 2013. "Price Discovery in Chinese Stock Index Futures Market: New Evidence Based on Intraday Data," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(1), pages 49-70, March.
    6. Chen, Wei-Peng & Chung, Huimin & Lien, Donald, 2016. "Price discovery in the S&P 500 index derivatives markets," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 438-452.
    7. Chaiyuth Padungsaksawasdi & Ali Parhizgari, 2017. "Major Currency ETFs and Their Associated Spot and Futures Rates," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(04), pages 1-32, December.
    8. Christoph Schmidhammer & Sebastian Lobe & Klaus Röder, 2016. "The day the index rose 11 %: a clinical study on price discovery reversal," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 79-106, January.
    9. Shuxin Guo, 2021. "Do futures lead the index under stress? Evidence from the 2015 Chinese market turmoil and its aftermath," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 91-110, January.
    10. Qiang Liu & Gaoxiu Qiao, 2017. "The evolving nature of intraday price discovery in the Chinese CSI 300 index futures market," Empirical Economics, Springer, vol. 52(4), pages 1569-1585, June.
    11. Yang Hu & Yang (Greg) Hou & Les Oxley, 2019. "Spot and Futures Prices of Bitcoin: Causality, Cointegration and Price Discovery from a Time-Varying Perspective," Working Papers in Economics 19/13, University of Waikato.
    12. Hu, Yang & Hou, Yang Greg & Oxley, Les, 2020. "What role do futures markets play in Bitcoin pricing? Causality, cointegration and price discovery from a time-varying perspective?," International Review of Financial Analysis, Elsevier, vol. 72(C).
    13. Xiaojie Xu, 2018. "Cointegration and price discovery in US corn cash and futures markets," Empirical Economics, Springer, vol. 55(4), pages 1889-1923, December.
    14. Christoph Schmidhammer & Sebastian Lobe & Klaus Röder, 2016. "The day the index rose 11 %: a clinical study on price discovery reversal," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 79-106, January.
    15. Lepone, Andrew & Yang, Jin Young, 2013. "Informational role of market makers: The case of exchange traded CFDs," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 84-92.
    16. Chen, Haiqiang & Choi, Paul Moon Sub & Hong, Yongmiao, 2013. "How smooth is price discovery? Evidence from cross-listed stock trading," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 668-699.
    17. Sanjay Sehgal & Mala Dutt, 2016. "Domestic and international information linkages between NSE Nifty spot and futures markets: an empirical study for India," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 43(3), pages 239-258, September.
    18. Hou, Yang & Li, Steven, 2017. "Time-Varying Price Discovery and Autoregressive Loading Factors: Evidence from S&P 500 Cash and E-Mini Futures Markets," MPRA Paper 81999, University Library of Munich, Germany.
    19. Lin, Chu-Bin & Chou, Robin K. & Wang, George H.K., 2018. "Investor sentiment and price discovery: Evidence from the pricing dynamics between the futures and spot markets," Journal of Banking & Finance, Elsevier, vol. 90(C), pages 17-31.
    20. Kumar, Satish, 2018. "Price discovery in emerging currency markets," Research in International Business and Finance, Elsevier, vol. 46(C), pages 528-536.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:18:y:2009:i:4:p:183-189. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.