Information content of implicit spot prices embedded in single stock future prices: Evidence from Indian market
Pathak, Rajesh Verousis, Thanos Chauhan, Yogesh
Pathak, Rajesh
Verousis, Thanos
Chauhan, Yogesh
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Publication Type
Journal article
Editor
Supervisor
Publication Year
2017
Journal
Journal of Emerging Market Finance
Book
Publication Volume
16
Publication Issue
2
Publication Begin page
169
Publication End page
187
Publication Number of pages
Collections
Abstract
This study examines the information content of pricing error, measured by the difference between the implied price computed using the cost of carry model and the spot price of Single Stock Futures (SSFs), traded on National Stock Exchange (NSE), India. The returns of portfolios, based on ranking of such pricing errors, are investigated. The consistency of results is verified by controlling for established risk factors, that is, market, size, value and momentum premium, and idiosyncratic factors such as firm’s liquidity and size. Our study reveals that the pricing error is a priced risk factor that contains incremental information about stock returns of day t, and not beyond. We conclude that implied spot prices from stock futures market are useful for traders to profit in the spot market.
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Keywords
Derivatives, Single-Stock-Futures, Cost-of-Carry, Pricing Error, informed trading