Intraday Price Discovery in the DJIA Index Markets

Yiuman Tse · Yang-pin Shen

87 citations0/0 files storedJournal of Business Finance &amp Accounting

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Market Dynamics and Volatility

Abstract

Abstract: This paper explores the dynamics of price discovery between the Dow Jones Industrial Average (DJIA) index and its three derivative products: the DIAMOND exchange‐traded fund (ETF), the floor‐traded regular futures, and the electronically traded mini futures. Even though the American Stock Exchange is the primary listing exchange for the ETF, the analysis indicates that the electronically traded ETF on the Archipelago (ArcaEx) electronic communications network dominates the price discovery process for DIAMOND shares. The E‐mini futures contribute the most to price discovery, followed by the ArcaEx DIAMOND. The DJIA index and regular futures contribute least to price discovery. The analysis is repeated using the derivatives of the S&P 500 index as a robustness check. The results indicate that multi‐market trading ensures greater pricing efficiency. Informed traders favor electronic trading because of immediate and anonymous trade execution.

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References

1995One Security, Many Markets: Determining the Contributions to Price Discovery 1990The Dynamics of Stock Index and Stock Index Futures Returns 1992A Further Analysis of the Lead–Lag Relationship Between the Cash Market and Stock Index Futures Market 2002Price discovery and common factor models 1991A Theory of Trading in Stock Index Futures 1987The Temporal Price Relationship Between S&P 500 Futures and the S&P 500 Index 2003Intraday Price Formation in U.S. Equity Index Markets 2004The “make or take” decision in an electronic market: Evidence on the evolution of liquidity

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2016Price discovery in the S&P 500 index derivatives markets 2009Price Formation in Spot and Futures Markets:Exchange Traded Funds vs. Index Futures 2011Has the introduction of S&P 500 ETF options led to improvements in price discovery of SPDRs?2017Does ETF trading affect the efficiency of the underlying index?2013Analysis of DJIA, S&P 500, S&P 400, NASDAQ 100 and Russell 2000 ETFs and their influence on price discovery

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