The effect of universal futures on opening and closing stock market price discovery

Abstract

Purpose

On 29 January 2001, Euronext LIFFE introduced single security futures contracts on a range of global companies. The purpose of this paper is to examine the impact that the introduction of these futures contracts had on the behaviour of opening and closing UK equity returns.

Design/methodology/approach

The paper models the price discovery process using the Amihud and Mendelson partial adjustment model which can be estimated using a Kalman filter.

Findings

Empirical results show that during the pre‐futures period both opening and closing returns under‐react to new information. After the introduction of futures contracts opening returns over‐react. A rise in the partial adjustment coefficient also takes place for closing returns but this is not large enough to cause over‐reaction.

Originality/value

This is the first study to examine the impact of a single security futures contract on the speed of spot market price discovery.

Citation

Chelley‐Steeley, P.L. and Steeley, J.M. (2011), "The effect of universal futures on opening and closing stock market price discovery", Studies in Economics and Finance, Vol. 28 No. 4, pp. 260-281. https://doi.org/10.1108/10867371111171537