Informed trading, short sales constraints and futures' pricing

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dc.contributor Suomen Pankki Hietala, Pekka Jokivuolle, Esa Koskinen, Yrjö 2014-09-22T07:58:22Z 2014-09-22T07:58:22Z 2000
dc.identifier.isbn 951-686-655-7
dc.identifier.issn 0785-3572
dc.identifier.issn 0785-3572
dc.description.abstract The purpose of this paper is to provide an explanation for relative pricing of futures contracts with respect to underlying stocks using a model incorporating short sales constraints and informational lags between the two markets.In this model stocks and futures are perfect substitutes, except for the fact that short sales are only allowed in futures markets.The futures price is more informative than the stock price, because the existence of short sales constraints in the stock market prohibits trading in some states of the world.If an informed trader with no initial endowment in stocks receives negative information about the common future value of stocks and futures, he is only able to sell futures.Uninformed traders also face a similar short sales constraint in the stock market.As a result of the short sales constraint, the stock price is less informative than the futures price even if the informed trader has received positive information.Stocks can be under- and overpriced in comparison with futures, provided that market makers in stocks and futures only observe the order flow in the other market with a lag.Our theory implies that: 1) the basis is positively associated with the contemporaneous futures returns; 2) the basis is negatively associated with the contemporaneous stock return; 3) futures returns lead stock returns; 4) stock returns also lead futures returns, but to a lesser extent; and 5) the trading volume in the stock market is positively associated with the contemporaneous stock return.The model is tested using daily data from the Finnish index futures markets.Finland provides a good environment for testing our theory, since short sales were not allowed during the period for which we have data (27 May 1988 - 31 May 1994).We find strong empirical support for the implications of our theory.
dc.format.extent 29 s.
dc.language.iso eng
dc.relation.ispartofseries Bank of Finland Research Discussion Papers
dc.subject Suomi
dc.subject hinnat
dc.subject hinnoittelu
dc.subject futuurit
dc.subject informaatio
dc.subject osakkeet
dc.subject sääntely
dc.subject mallit
dc.subject kaupankäynti
dc.subject SP
dc.subject RM
dc.title Informed trading, short sales constraints and futures' pricing
dc.type Sarjajulkaisu
dc.identifier.urn URN:NBN:fi:bof-20140807384 Suomen Pankin keskustelualoitteita Bank of Finland. Discussion papers
dc.series.year 2000
dc.series.number 4/2000
dc.series.sortingnumber 4 18.5.2000
dc.contributor.orgunit Rahoitusmarkkinaosasto
dc.contributor.orgunit Financial Markets Department

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