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The Journal of Derivatives

The Journal of Derivatives

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Article

Price Formation in Spot and Futures Markets: Exchange Traded Funds vs. Index Futures

Bernd Schlusche
The Journal of Derivatives Winter 2009, 17 (2) 26-40; DOI: https://doi.org/10.3905/JOD.2009.17.2.026
Bernd Schlusche
is a Ph.D. candidate at the department of economics, University of Bonn in Bonn, Germany. bernd.schlusche@uni-bonn.de
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Abstract

This article examines the issue of price leadership between a derivative and its underlying—in this case, the German DAX index and an exchange-traded fund (ETF) based on the DAX portfolio of stocks. Previous researchers had found that changes in DAX futures prices led movements in the underlying DAX index. Schlusche tests to see whether that result carries over to DaxEx, the DAX ETF traded on the EUREX exchange. He shows that both markets contribute to price discovery, but the influence of the DAX futures is about three times greater than the influence of the ETF. Digging more deeply into the relationship, he finds that the relative importance of the two markets in price determination varies over time, with the ETF carrying greater weight in times of higher volatility, while variations in relative trading volume, which he takes to be a measure of relative liquidity, do not seem to matter.

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The Journal of Derivatives: 17 (2)
The Journal of Derivatives
Vol. 17, Issue 2
Winter 2009
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Price Formation in Spot and Futures Markets: Exchange Traded Funds vs. Index Futures
Bernd Schlusche
The Journal of Derivatives Nov 2009, 17 (2) 26-40; DOI: 10.3905/JOD.2009.17.2.026

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Price Formation in Spot and Futures Markets: Exchange Traded Funds vs. Index Futures
Bernd Schlusche
The Journal of Derivatives Nov 2009, 17 (2) 26-40; DOI: 10.3905/JOD.2009.17.2.026
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  • Article
    • Abstract
    • METHODOLOGY
    • EXCHANGE-TRADED FUNDS
    • DATA
    • EMPIRICAL RESULTS
    • DETERMINANTS OF PRICE LEADERSHIP
    • CONCLUSIONS
    • APPENDIX A
    • ENDNOTES
    • REFERENCES
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Cited By...

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  • An Alternative Option to Portfolio Rebalancing
  • Editor’s Letter
  • The Second Partial Derivative of Option Price with Respect to the Strike: A Historical Reminiscence
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