Price Discovery Process Research Articles

Designing postcapitalist finance in Protocols for Postcapitalist Expression

Abstract Protocols for Postcapitalist Expression, the Economic Space Agency’s latest experiment in radical economic design, explores the possibility of designing a digitally native economy that is geared towards care, the arts, and the environment, and which not only refuses to give up on the financial frontiers of contemporary capitalism, but actively seeks to marshal them towards innovative ends. The architecture of a novel economic space comes into view through a set of protocols, which integrate economic information within a social value framework. This ‘Economic Space Protocol’ involves crafting a new grammar for economic information production processes that have traditionally been tied to competitive market behavior. This essay interrogates the place of finance in the book, emphasizing price discovery’s generativity with regards to information. What is necessary in the imagination of any postcapitalist future are radical design initiatives that contend with both the necessity and the limits of the price discovery process.

The relevance of dark trading for information acquisition in the German stock market

The implementation of the European double volume cap (DVC) mechanism acts as an exogenous shock to help understand how restrictions on dark trading affect the price discovery process for German stocks. Using the price jump ratio as a measure of information acquisition prior to earnings announcements, we show that dark pool trading aids information acquisition. This relationship is stronger for negative earnings news, for stocks that are hard to value, and when there is uncertainty around earnings. The introduction of the DVC mechanism weakens the relationship between dark trading and pre-announcement information acquisition.

Cointegration and causality relationship of Indian stock market with selected world markets.

Background: The purpose of this study is to explore the trends and causes of established and emerging nations' stock market integration with India. The National Stock Exchange (NSE) indices act as a counterweight to international market indices. This study investigates the sustained interest of foreign investors in the Indian stock market in the wake of capital market reforms, as well as whether it moves in tandem with other markets in Asia and the United States. Methods: Our study examined the possibility of cross-country cointegration between the largest economies and indices around the world using multiple financial econometric models, such as Augmented Dickey-Fuller, Unit Root, Correlation, and Johansen Cointegration. Results: The findings of this study significantly support the notion that Indian and international financial markets are highly integrated. Vector error correction model indicates that the Indian market (NSE) is highly cointegrated with the US market (National Association of Securities Dealers Automated Quotations) and increased volatility signifies global contagion. Conclusion: A cursory examination of the data reveals distinct investment and portfolio diversification options for global investors. This could assist regulators in formulating more effective rules regarding price discovery processes.

Wisdom of crowds or awkward squad? Social interaction and the information efficiency of the Chinese capital market

Existing studies on the impact of social media on the information efficiency of capital markets have opposing views. One often-overlooked aspect in these studies is the role of investor interaction, a core feature of social media. To address this gap, we employ social network analysis (SNA) to investigate how investor interactions on Eastmoney, China's largest online stock forum, influence capital market efficiency. Our findings indicate that online investor communication can effectively disseminate firm-specific information through social networks when investor interactions are at a moderate level. However, beyond a certain threshold, heightened interactions contribute to market noise, thereby distorting the stock price discovery process. Our mechanistic analysis reveals that increased investor interactions stimulate irrational emotions at both market and stock levels, ultimately impairing capital market efficiency. This study contributes to social network analysis and behavioral finance by illuminating the impact of online social interactions among retail investors on capital market information efficiency.

PRICE DISCOVERY EFFICIENCY IN BIST LIQUIDITY BANK INDEX USING DEFERRED FUTURES: A MULTILAYER PERCEPTRON NEURAL NETWORK APPROACH

The literature indicates that the process of price discovery in spot and futures can be bidirectional. This study novelty lies in its analysis of the spot data of the BIST liquid bank index, a relatively new index in Turkey, using futures contracts of different maturities with a multi-layer perceptron (MLP) artificial neural network model. The efficacy of the models is evaluated by examining the capacity of futures prices to inform spot price discovery. The effectiveness of the MLP models is measured by low mean squared error (MSE) ratios relative to the out-of-samples test series results. The findings indicate that the one- and two-next futures contracts of the liquid bank index are more effective than the nearest futures contracts in explaining spot prices. Additionally, the nearest expiry contracts are observed to exhibit higher variances than the others. The most efficient pricing model including both spot and futures as explaining variables, is autoregression with three lags for spot and two lags for the two next futures contracts. These results must be considered when implementing risk management strategies for individuals engaged in spot and futures transactions.

An Empirical Analysis of Price Discovery and Causal Relationship Between Futures and Spot Market in India

The derivatives market has witnessed many positive experiences over the cash market, and it is leading to the price discovery process. It signifies that the price movements in the derivative segment strongly influence the cash market and that the cash market follows the derivative market for price determination. The price discovery happens in the derivative segment which is one of the functions of the derivative market. Both the futures and spot markets try to maintain equilibrium whenever disequilibrium occurs between the spot and futures market. Nifty IT futures and spot prices exhibit short-run relationship; whenever disequilibrium occurs in the co-integrated series, it is the futures market that makes greater adjustments in order to re-establish the equilibrium.

Does express delivery run ahead of stock price?

Abstract We study the role of logistics information in the stock price discovery process. Using a proprietary dataset on parcel-level express delivery service records from one of the largest express service providers in China, we find that express delivery contains firm-specific information for stock pricing. A long/short portfolio of buying (selling) stocks with high (low) quarterly growth in the number of parcels sent by firms generates an 8.23 percent risk-adjusted annual return. The return predictability is more significantly driven by document, light, and business-to-business parcels, which reflects the intensity of a firm’s overall operations (rather than just sales growth), and by parcels sent to new addresses, which represents new business expansion. Echoing this return predictability, parcel growth also predicts firm growth, profitability, and earnings surprises. Finally, we provide evidence on return predictability associated with topology of logistic network identified by parcel delivery data.

Nonlinear price transmission and asynchronous price bubbles: empirical evidence from China’s agricultural futures and spot markets

ABSTRACT Previous studies on commodity price bubbles mainly focused on futures markets and ignored the performance of spot markets. Using the price data for corn and soybeans in China, this study identifies the exact bubble dates for the futures and spot markets, and finds asynchronous price bubbles between these two markets. Bubbles are more frequent for commodity spot prices, while the corresponding futures prices still dominate the process of price discovery. Further analysis reveals that, the lack of (immediate) linear transmission between the cointegrated prices may have inhibited bubble synchronization, and caused more spot price bubbles. The nonlinear transmission effects between the futures and spot prices suggest the existence of speculative storage and market power. This may further explain why spot price bubbles cannot be arbitraged away.

Competency and efficacy of energy futures: empirical investigation from emerging economy

PurposeThe purpose of this study is to analyze the price discovery and market efficiency of energy futures traded in India. The study also examines the volatility spillover effect between the cash and futures markets of energy commodities.Design/methodology/approachThe study uses crude oil and natural gas spot and futures series traded at Multi Commodity Exchange (MCX), India. To evaluate the objectives, the paper employs the cointegration test, causality check, dynamic ordinary least squares (DOLS) method and Baba, Engle, Kraft and Kroner (BEKK) GARCH Model.FindingsThe study supports the long-run association between the selected markets. Unlike natural gas, in the case of crude oil bidirectional, flow of information is observed. The study rejects the unbiasedness and efficient market hypothesis of the energy futures market in India. Further, the study confirms that the selected energy commodities indicate bidirectional shock transmission between their respective cash and futures markets.Practical implicationsThe study will assist the commodity market participants in designing their trading strategy. The volatility signal will be used by investors and portfolio managers for risk management and portfolio adjustment. Regulators will be able to anticipate future spillover and can design policies to strengthen the market.Originality/valueThe paper evaluates the three aspects of the energy futures market, namely price discovery, market efficiency and volatility slipover. To the best of the authors’ knowledge, studies on efficacy and shock transmission in the context of the energy futures market in India are rare. Further, the study also contributes by investigating the price discovery process of the energy futures market.

Analysis of the Relationship between Futures Prices and Mandi Spot Prices of Spices in India

For this study, we used secondary data and applied various statistical methods, including the compound growth rate, ADF test, seasonality analysis, Johansen's cointegration test, and the Granger Causality Test. The findings revealed a positive trend in the prices of selected spices, indicating a significant growth rate for both prices and arrivals. Seasonality in prices was observed, particularly during the peak season. The price series were found to be cointegrated at a significance level of 1 per cent, and a uni-directional causality was identified in both spices. It suggested that futures prices played a dominant role in the price discovery process. It was recommended to improve warehouse structures and storage chambers to enhance the retention capacity of farmers, thereby emphasizing the importance of proper storage facilities.

Interaction between price discovery, market liquidity and arbitrage activity: International evidence

The aim of this study is to investigate the dynamic of price discovery for cross-listed stocks using high-frequency intraday data. We show that the local market leads price discovery process with a significant contribution of the foreign US market. Moreover, we find that arbitrage opportunities enhance market liquidity of cross-listed firms, and vice versa. A higher US market contribution to price discovery provides an increase in the local trading volume as well as in arbitrage opportunities frequency. This latter leads to greater local market contribution to price discovery confirming the information-based transactions in the domestic markets of US cross-listed firms.

Momentum Origin and Investor Behaviors on Wall Street

The Efficient Market Hypothesis (EMH) asserts that consistently outperforming the market is implausible because market prices promptly incorporate all available information. However, the momentum strategy has demonstrated consistent profitability, which poses a significant challenge to the EMH and suggests the presence of factors that extend beyond existing theoretical frameworks in influencing price movements. Here we present a model attributing changes in asset return to behavior interactions between liquidity takers and providers that directly impact price formation and discovery processes. The analysis of the measured behavior of liquidity takers and inferred market microstructure due to behaviors of liquidity providers generates signals relating to the forming, terminating, and reversal of price momentums. Applying these signals to the 1987 market crash yields warning flags about the looming crisis weeks before the sudden market plunge on Black Monday. As market crises always correspond with substantial negative price momentum, our model can serve to mitigate or avoid catastrophic investment losses during such events.

Price Discovery and Market Efficiency in India's Financial Futures Market within the Derivatives Landscape: An Empirical Analysis

This study offers a robust, long-term analysis of price discovery and the persisting lead-lag relationship between India’s equity futures and spot markets. Utilising monthly data from April 2005 to December 2022, it filters transient noise typically associated with high-frequency data. Information Share and Common Factor Weight methodologies within the Vector Error Correction (VEC) framework consistently reveal the dominance of futures markets in the price discovery process. The insights remain consistent across three distinct periods spanning the global financial crisis and the COVID-19 pandemic. The volatility dynamics and asymmetry effects in the Indian equity futures and spot markets using the Vector Error Correction - Exponential General Autoregressive Conditional Heteroskedastic (VEC-EGARCH) approach uncover notable asymmetry effects, signifying a strong market sensitivity to negative news. This highlights the necessity for comprehensive risk management strategies and stringent regulatory supervision, especially in light of the significant growth and systemic risks in the Indian derivatives market.

Does Random Auction Ending Curb Stock Price Manipulation?

This paper examines the effect on stock market efficiency and potential market manipulation of introducing a random ending time for the call auctions that start and end continuous trading on three equity markets. We find that the probability of a price dislocation at the end of the auction declines, indicating a lower risk of market manipulation. In addition, the variance ratio and market-adjusted return volatility measures decrease, suggesting a more efficient and less volatile price discovery process. We confirm a behavioral change in order submissions by observing the timing of order entry, amendments, and deletions on one of the exchanges for which we have access to order data. Overall, our results indicate that adding a random auction ending time can reduce the risk of stock market manipulation and improve price efficiency.

The asymmetric effect of retail investor attention: new evidence from post-recommendation revision drift

ABSTRACT This paper investigates the effect of retail investor attention on market reaction following analysts’ recommendation revisions in the Chinese stock market. The results suggest that the impact of retail attention on post-recommendation revision drift is asymmetric. Specifically, retail attention mitigates post-upgrade announcement drift, whereas it aggravates post-downgrade drift. After a series of arrangements to address the potential endogeneity concerns and ensure robustness, the results still hold. Moreover, we reveal retail attention facilitates the absorption of individual firms’ information and increases liquidity to attenuate post-upgrade drift, whereas retail attention induces underreaction due to short-sale restrictions and disposition effects regarding stronger post-downgrade drifts. The results of the additional heterogeneity test provide further evidence of channel tests and reveal that prior positive sentiment can accelerate the integration of good news into stock prices. These findings enrich the existing literature on retail investors’ role in the price discovery process following the release of fundamental information.

Price discovery of the Chinese crude oil options and futures markets

China's crude oil derivatives market has attracted extensive attention since its futures contracts were officially listed in 2018. This study examines the price discovery ability between Shanghai's crude oil options market and the corresponding futures market. Results show that futures lead options and the intraday distribution of options information share has a ‘w’ shape. Intraday seasonality of futures volume and the international crude oil market have significant impacts on the price discovery process. This study is the first empirical analysis of Shanghai crude oil options in terms of price discovery and presents novel insights into China's crude oil derivatives market.

Derivatives Market: A Survey

Our research paper surveys prior research on derivatives markets. We mainly review the literature investigating the impact of introducing derivatives markets on the underlying market and the overall economic development. Particularly, we summarize papers investigating the effects on the spot market liquidity, spot market volatility, and the price discovery process. We review the literature on several countries, but the survey paper appears to be concentrated on Saudi Arabia. Our paper contributes to the literature and sheds light on introducing the derivatives market in Saudi Arabia. This survey is useful to policymakers and investors as well.

Funding constraints, financial crisis, and price discovery between the futures and spot markets

AbstractWe investigate the effect of funding constraints and the financial crisis on the pricing dynamics between the spot and futures markets. Tighter funding constraints and the presence of a financial crisis deter informed investors from utilizing their informational advantage in the futures market, reducing the leading role and information shares of futures prices. Funding constraints negatively affect the probability of informed trading and large trading in the futures markets. Our findings are in line with the recent theoretical perspective that indicates both factors significantly affect informed trading, the cross‐market process of price discovery, and financial stability.

Cointegration and causality relationship of Indian stock market with selected world markets

Background: The purpose of this study is to explore the trends and causes of established and emerging nations’ stock market integration with India. The National Stock Exchange (NSE) indices act as a counterweight to international market indices. This study investigates the sustained interest of foreign investors in the Indian stock market in the wake of capital market reforms, as well as whether it moves in tandem with other markets in Asia and the United States. Methods: Our study examined the possibility of cross-country cointegration between the largest economies and indices around the world using multiple financial econometric models, such as Augmented Dickey-Fuller, Unit Root, Correlation, and Johansen Cointegration. Results: The findings of this study significantly support the notion that Indian and international financial markets are highly integrated. Vector error correction model indicates that the Indian market (NSE) is highly cointegrated with the US market (National Association of Securities Dealers Automated Quotations) and increased volatility signifies global contagion. Conclusion: A cursory examination of the data reveals distinct investment and portfolio diversification options for global investors. This could assist regulators in formulating more effective rules regarding price discovery processes.

Research on Price Discovery in Financial Securities: Trends and Directions for Future Research

The futures contracts were introduced to act as hedging instruments and ensure the price discovery (referred to as PD hereafter) mechanism for the underlying securities. If the price movement of a futures contract leads the price movement of the underlying securities in the spot market, this confirms the existence of price discovery in the market. This study undertakes an in-depth analysis of past research in order to find research trends and directions for the future in the field of price discovery. The bibliometric analysis technique is used to analyse the existing literature. The study considers the 1431 documents collected from the Scopus database for the period of 1982–2021 to conduct the descriptive and network analysis of search results. The study identifies three key clusters, i.e., the foundation of the price discovery process (Cluster 1), the econometric tools and techniques to assess the price discovery process (Cluster 2), and price discovery under different market conditions and constraints (Cluster 3). After an in-depth content analysis of these clusters, the study provides suggestions for future research in the field of price discovery. The study is the first of its type to conduct an in-depth analysis of the literature of price discovery since inception, and provides directions for future research in the field.