Abstract:
Stock futures offer leveraged positions and are expected to attract informed traders. However, many
researchers have found that the information share of the stock futures is surprisingly small; the equity
spot market appears to play a large role in price discovery. In this paper, we investigate this
phenomenon and offer two findings. First, liquidity of the stock futures plays a major role in influencing
price discovery. The securities where the spot market plays a major role tend to be those with illiquid
stock futures. The enhanced transactions costs appear to counterbalance the gains from leveraged
trading. In addition, when large price movements take place, the stock futures appear to play a much
more important role. These findings help fill out our understanding of the role of the equity spot and
single stock futures markets in price discover
