Futures Trading and Market Microstructure of the Underlying Security
Author | : Kate Phylaktis |
Publisher | : |
Total Pages | : 34 |
Release | : 2013 |
ISBN-10 | : OCLC:1290235685 |
ISBN-13 | : |
Rating | : 4/5 (85 Downloads) |
Book excerpt: This paper examines the differences in volume, volatility and liquidity during intervals when futures trade with those in which they do not trade using high frequency data. We find that order flow in the cash market increases when futures trade, but at the same time we find volatility to increase too. Although the bid-ask spread is reduced when futures trade, the decomposition of the spread indicates that this is not due to a fall in the adverse selection component, which represents information asymmetries. In fact, the results show that market depth is also reduced when futures trade, which supports the view that the tightening of the spread could be due to a fall in inventory holding costs. This paper has indicated that market quality might not necessarily improve with futures trading.