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Price Discovery and Liquidity Characteristics for U.S. Electronic Futures and ETF Markets

A. Senol Oztekin, Suchismita Mishra, Pankaj K. Jain, Robert T. Daigler, Sascha Strobl and Richard D. Holowczak
The Journal of Trading Spring 2017, 12 (2) 59-72; DOI: https://doi.org/10.3905/jot.2017.12.2.059
A. Senol Oztekin
is a quantitative research analyst at Hepa Investment Co. in Ibul, Turkey.
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  • For correspondence: senoloztekin@yahoo.com
Suchismita Mishra
is an associate professor in the Department of Finance in the College of Business at Florida International University in Miami, FL.
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  • For correspondence: mishras@fiu.edu
Pankaj K. Jain
is a professor in the Fogelman College of Business and Economics at the University of Memphis in Memphis, TN.
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  • For correspondence: pjain@memphis.edu
Robert T. Daigler
is a professor in the Department of Finance in the College of Business at Florida International University in Miami, FL.
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  • For correspondence: daiglerr@fiu.edu
Sascha Strobl
is an assistant professor in the International Business College Department of Finance and Economics at Dongbei University of Finance and Economics in Dalian, Liaoning, China.
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  • For correspondence: drsstrobl@dufe.edu.cn
Richard D. Holowczak
is an assistant professor in the Paul H. Chook Department of Information Systems and Statistics at Baruch College in City University of New York in New York, NY.
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  • For correspondence: richard.holowczak@baruch.cuny.edu
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Abstract

Using high-frequency datasets, we examine price discovery and its determinants for equivalent instruments across futures markets, electronically traded exchange-traded funds (ETFs), and spot markets. We compare futures to ETFs—leveraged and unleveraged—for stock indexes, using both a normal period and the 2008 financial crisis. Yan and Zivot’s information leadership procedure is employed to determine which instrument dominates price discovery. We then examine the determinants and characteristics of the price discovery process using Hasbrouck’s sequential trading model for the price impact of large trades. We find that most price discovery occurs in the more liquid and highly leveraged futures market. Although liquidity declined in all markets during the financial crisis, the relative contribution of ETFs to price discovery increased. We also find that the information leadership shares of futures and ETFs depend on the ratio of the quoted percentage spread between futures and ETFs and the aggregate volatility occurring in these markets.

TOPICS: Exchange-traded funds and applications, big data/machine learning, futures and forward contracts

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The Journal of Trading: 12 (2)
The Journal of Trading
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Spring 2017
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Price Discovery and Liquidity Characteristics for U.S. Electronic Futures and ETF Markets
A. Senol Oztekin, Suchismita Mishra, Pankaj K. Jain, Robert T. Daigler, Sascha Strobl, Richard D. Holowczak
The Journal of Trading Mar 2017, 12 (2) 59-72; DOI: 10.3905/jot.2017.12.2.059

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Price Discovery and Liquidity Characteristics for U.S. Electronic Futures and ETF Markets
A. Senol Oztekin, Suchismita Mishra, Pankaj K. Jain, Robert T. Daigler, Sascha Strobl, Richard D. Holowczak
The Journal of Trading Mar 2017, 12 (2) 59-72; DOI: 10.3905/jot.2017.12.2.059
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  • Article
    • Abstract
    • LITERATURE REVIEW
    • DATA
    • EMPIRICAL METHODOLOGY—PRICE DISCOVERY
    • EMPIRICAL METHODOLOGY—DETERMINANTS OF THE PRICE DISCOVERY PROCESS IN FUTURES AND ETFs
    • RESULTS: PRICE DISCOVERY, LIQUIDITY AND MARKET DEPTH IN FUTURES AND ETF MARKETS
    • THE DETERMINANTS OF PRICE DISCOVERY
    • CONCLUSIONS
    • ENDNOTES
    • REFERENCES
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  • PDF (Subscribers Only)

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