Price discovery in the S&P 500 index derivatives markets

Wei Peng Chen*, Huimin Chung, Donald Lien

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

This study sets out to examine the dynamics of price discovery between the S&P 500 index and its derivative products: the index futures, the index options, the S&P 500 exchange-traded funds (SPDRs), and the SPDR options. Empirical results reveal that overall the contribution of SPDRs to price discovery exceeds the contribution of E-mini index futures except in the high volatility period. However, E-mini index futures contribute higher information share than SPDRs in the high volatility sub-period, indicating that E-mini index futures play an important role on hedge strategies. The results are associated with (i) increasing institutional ownership in SPDRs and (ii) the rapid growth of algorithmic trading (AT) and high-frequency trading (HFT) by institutional investors.

Original languageEnglish
Pages (from-to)438-452
Number of pages15
JournalInternational Review of Economics and Finance
Volume45
DOIs
StatePublished - 1 Sep 2016

Keywords

  • Algorithmic trading
  • High-frequency trading
  • Institutional ownership
  • Price discovery
  • S&P 500 index and derivative markets

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