nach oben

Review of Quantitative Finance and Accounting

Erschienen in:

01.01.2016 | Original Research

The day the index rose 11 %: a clinical study on price discovery reversal

verfasst von: Christoph Schmidhammer, Sebastian Lobe, Klaus Röder

Erschienen in: Review of Quantitative Finance and Accounting | Ausgabe 1/2016

Einloggen

Aktivieren Sie unsere intelligente Suche, um passende Fachinhalte oder Patente zu finden.

search-config

KI-gestützte Suche

Aus

Abstract

On October 28, 2008, Germany’s leading equity index Deutscher Aktienindex (DAX) rose 11.28 % which is the highest daily performance since its inception. That day, the arbitrage relationship between the cash and the futures market broke down. Based on this clean natural experiment, we examine price innovation dynamics of DAX related spot products for the days surrounding the event day. We find that price discovery is strongly reversed during the extreme event day with futures losing their common leadership to less liquid index certificates of market leading issuers. Evidently, strategic quote setting of certificate issuers drives the negative futures spot basis. An important broader implication from our research is that such an event is not unlikely to reoccur in the future. Although the Deutsche Börse AG calculating the DAX has reconsidered its rules since then, 30 out of 49 leading indices around the world do not include a relative weight cap. When the number of included firms is additionally low, the odds of another “Volkswagen event” increase. 14 out of the 30 uncapped indices include less than 50 firms.

Vorheriger Artikel Pre-evaluating technical efficiency gains from possible mergers and acquisitions: evidence from Japanese regional banks

Nächster Artikel Effects of frequent information disclosure: the case of daily net asset value reporting for closed-end investment companies

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Jetzt informieren

Nur mit Berechtigung zugänglich

See Porsche’s “Newsarchiv” or Funke, Johanning and Michel (Funke et al. 2009) among others who study the price jump of Volkswagen and its consequences for the DAX.

The Xetra closing price of Volkswagen shares before Porsche’s announcement was Euro 210.85.

The futures spot basis is especially of interest to investors seeking for arbitrage opportunities and to regulators since futures and derivatives markets are often blamed as drivers of speculation bubbles (Wurgler 2011).

In contrast to our perspective focused on an extreme event, a long term study of Masset and Wallmeier (2010) identifies that DAX returns influence index products.

For Volkswagen shares, overall 92,551 trades between 9:00 and 17:30 can be observed with 41,084 trades between 9:30 and 12:30 during the breakdown of the futures-cash arbitrage relationship. On average, the Volkswagen share is traded more than three times per second. Since the DAX index is calculated each second relying on the most recent trade prices, non-synchronous trading problems are not existent.

It is noteworthy that this finding contradicts current political discussions regarding “speculation bubbles”.

This leads to a reduced performance of DAX related index products with negative effects for investors.

Among others, Funke et al. (2009) study the price jump of Volkswagen and its consequences for the DAX.

The inventory of DAX index ETFs is held as a separate asset. Hence, it does not bear any default risk of an issuer.

ETF product trading details are taken from the issuers’ prospectuses.

Being constructed as a bearer note, the redemption of an index certificate depends on the solvency of the issuer. Wallmeier (2011) provides a detailed analysis of risks involved with certificates.

Schlusche (2009) finds that DAX futures lead the price discovery versus the DaxEx, an exchange traded fund replicating the DAX.

Indicative net asset values are calculated during the day representing intraday fund values.

Market reaction to extreme events can be described by the uncertain information hypothesis. Analyzing the S&P 500 and the corresponding SPDRs, Yu et al. (2010) confirm the uncertain information hypothesis. However, the authors conclude that the market is short-term efficient.

A considerable body of academic research relies on Hasbrouck’s methodology or modifications to investigate price discovery like Martens (1998), Theissen (2002), Covrig and Melvin (2002), Brandt and Kavajecz (2004), Chakravarty et al. (2004), Forte and Peña (2009), Poskitt (2010), and Fricke and Menkhoff (2011) among others.

Although there are examples uncovering that spot markets dominate futures markets like Chen, Lin, Chou and Hwang (Chen et al. 2002), or Lin, Chen, Hwang and Lin (Lin et al. 2002), futures markets are commonly identified to lead the price discovery process.

Other papers examining the price discovery process in futures markets versus cash markets are Brockman and Tse (1995), Mizrach and Neely (2008), Rosenberg and Traub (2009), Chen and Gau (2010), or Choy and Zhang (2010).

Based on the total sample of 1-month DAX option contracts, we control for abnormal trading activities of DAX put and call options during the sample period. Since trading activities on October 28, 2008, are only slightly above the sample average and trading “peaks” occurred on October 29, 2008, there is no indication of a change in price innovation dynamics induced by DAX options. Studies supporting the effect of high trading costs on the price discovery process are Fleming et al. (1996), Lien and Shrestha (2009), or Choy and Zhang (2010).

Using data from leading trading platforms like XETRA contributes to the robustness of our results. Distortions caused by a trading place bias identified by Cheng et al. (2008) for US and Hong Kong ETF markets are not present in this paper.

The screening procedure includes a manual control for daily outliers from high to low. Bid-ask quotes are controlled for negative spreads and missing values.

See Dennis and Mayhew (2009).

See also Fricke and Menkhoff (2011). Hasbrouck (2003) further discusses problems using midquotes (for ETFs and index certificates) and (futures) prices together. He concludes that a possible adjustment of futures prices, e.g., applying a Kalman filter to reduce the bid-ask bounce would not be appropriate since this would deteriorate the information set.

The relation accounts for the fact that 2008 is a leap year.

The total expense ratio is a percentage of an ETF’s NAV and comprises management fees. For the calculation of adjustment factors, we use annual total expense ratios as published in the product information prospectuses.

The efficient price process can be worked out by an Engle and Granger (1987) error correction representation.

This means that each series has a unit root and is stationary in the first differences.

For N products, the variance–covariance matrix \(\varOmega\) contains N rows and N columns. In the case where error terms are uncorrelated, \(\varOmega\) is a diagonal matrix.

See also, e.g., Fricke and Menkhoff (2011).

Solely analyzing October 28, 2008, time series can also be regarded as I(1) stationary.

Mean values of index certificates’ Hasbrouck information shares are added.

According to the information of an ETF issuer, institutional investor trades are directly conducted by emitting companies which rely on actual fund values. Since institutional trade prices are not publicly available, the inclusion of iNAVs can provide relevant information for institutional investors.

Again, 18 lags are included for the time span from October 27, 2008 to October 31, 2008. The results of the Johansen cointegration rank tests suggest that each ETF and index certificate is cointegrated with the index futures.

In the bivariate case, mean values of Hasbrouck information shares are not included since they can be directly derived from upper and lower bounds.

This has been conveyed to us in discussions with institutional investors.

We received this information from an ETF issuer.

Volkswagen shares were priced at Euro 210.85 the day before Porsche’s announcement (which was slightly above the year 2008 average of Euro 191) and increased and rose up to Euro 635 on October 27, 2008, the day after Porsche’s announcement. Due to the rise of Volkswagen shares the DAX gained 8.27 %, but the futures spot arbitrage bound was not violated since futures markets reflected the extraordinary price jump of Volkswagen.

Representative studies analyzing control premia can be found in Eckbo and Langohr (1989), Cotter and Zenner (1994), Rydqvist (1996), Nenova (2003), Moeller (2005), Betton et al. (2009), and Giannetti and Laeven (2009).

The DAX index is calculated at a one-second level of resolution based on the most recent shares prices. Volkswagen shares were traded on average more than three times per second (Xetra tick data) when the index and the futures diverged. Hence, the DAX index reflects actual Volkswagen share prices.

The weighting of a specific stock is now capped when the threshold of 10 % capital weight is reached.

Based on Schmidhammer et al. (2014), we provide an overview of country-specific leading equity indices in the appendix illustrating this potential risk. “Appendix 2” reports relevant index features, e.g., whether shares in the index are capped, along with the cap size, and the number of included firms.

Alexander C, Barbosa A (2008) Hedging index exchange traded funds. J Bank Financ 32:326–337CrossRef

Antoniou A, Garrett I (1993) To what extent did stock index futures contribute to the October 1987 stock market crash? Econ J 103:1444–1461CrossRef

Baillie RT, Booth GG, Tse Y, Zabotina T (2002) Price discovery and common factor models. J Financ Mark 5:309–321CrossRef

Betton S, Eckbo BE, Thorburn KS (2009) Merger negotiations and the toehold puzzle. J Financ Econ 91:158–178

Blume ME, Stambaugh RF (1983) Biases in computed returns—an application to the size effect. J Financ Econ 12:387–404CrossRef

Blume ME, MacKinlay AC, Terker B (1989) Order imbalances and stock price movements on October 19 and 20, 1987. J Financ 44:827–848CrossRef

Booth GG, So RW, Tse Y (1999) Price discovery in the german equity index derivatives markets. J Futures Mark 19:619–643CrossRef

Brandt MW, Kavajecz KA (2004) Price discovery in the U.S. treasury market: the Impact of orderflow and liquidity on the yield curve. J Financ 59:2623–2654CrossRef

Brockman P, Tse Y (1995) Information shares in canadian agricultural cash and futures markets. Appl Econ Lett 2:335–338CrossRef

Chakravarty S (2001) Stealth-trading: which traders’ trades move stock prices. J Financ Econ 61:289–307CrossRef

Chakravarty S, Gulen H, Mayhew S (2004) Informed trading in stock and option markets. J Financ 59:1235–1257CrossRef

Chen YL, Gau YF (2010) News announcements and price discovery in foreign exchange spot and futures markets. J Bank Financ 34:1628–1636CrossRef

Chen SY, Lin CC, Cou PH, Hwang DY (2002) A comparison of hedge effectiveness and price discovery between TAIFEX TAIEX index futures and SGX MSCI Taiwan index futures. Rev Pac Basin Financ Mark Policies 5:277–300CrossRef

Cheng LTW, Fung HG, Tse Y (2008) China’s exchange traded fund: is there a trading place bias? Rev Pac Basin Financ Mark Policies 11:61–74CrossRef

Choy SK, Zhang H (2010) Trading costs and price discovery. Rev Quant Financ Account 34:37–57CrossRef

Conrad J, Kaul G (1993) Long-term market overreaction or biases in computed returns? J Financ 48:39–63CrossRef

Cotter JF, Zenner M (1994) How managerial wealth affects the tender offer process. J Financ Econ 35:63–97CrossRef

Covrig V, Melvin M (2002) Asymmetric information and price discovery in the FX market: does Tokyo know more about the yen? J Empir Financ 9:271–285CrossRef

De Bondt WFM, Thaler R (1985) Does the stock market overreact? J Financ 40:793–805CrossRef

De Jong F (2002) Measures of contributions to price discovery: a comparison. J Financ Mark 5:323–327CrossRef

Dennis P, Mayhew S (2009) Microstructural biases in empirical tests of option pricing models. Rev Deriv Res 12:169–191CrossRef

Eckbo BE, Langohr H (1989) Information disclosure, method of payment, and takeover premiums: public and private tender offers in France. J Financ Econ 24:363–403CrossRef

Engle RF, Granger CWJ (1987) Co-integration and error correction: representation, estimation, and testing. Econometrica 55:251–276CrossRef

Fisher L, Weaver DG, Webb G (2010) Removing biases in computed returns. Rev Quant Finan Account 35:137–161CrossRef

Fleming J, Ostdiek B, Whaley RE (1996) Trading costs and the relative rates of price discovery in stock, futures and option markets. J Futures Mark 16:353–387CrossRef

Forte S, Peña JI (2009) Credit spreads: an empirical analysis on the informational content of stocks, bonds and CDS. J Bank Financ 33:2013–2025CrossRef

Fricke C, Menkhoff L (2011) Does the “bund” dominate price discovery in Euro bond futures? Examining information shares. J Bank Financ 35:1057–1072CrossRef

Funke C, Johanning L, Michel G (2009) Kurskapriolen der VW-Aktie: Auswirkungen auf den DAX und das aktive Fondsmanagement. xtp Transaction Partners GmbH, Frankfurt

Garbade KD, Silber WL (1979) Dominant and satellite markets: a study of dually-traded securities. Rev Econ Stat 61:455–460CrossRef

Giannetti M, Laeven L (2009) Pension reform, ownership structure, and corporate governance: evidence from a natural experiment. Rev Financ Stud 22:4091–4127CrossRef

Glosten LR, Milgrom PR (1985) Bid, ask and transaction prices in a specialist market with heterogeneously informed traders. J Financ Econ 14:71–100CrossRef

Gonzalo J, Granger CWJ (1995) Estimation of common long-memory components in cointegrated systems. J Bus Econ Stat 13:27–35

Goodhart C (1988) The foreign exchange market: a random walk with a dragging anchor. Economica 55:437–460CrossRef

Harris L (1989) The October 1987 S&P 500 stock-futures basis. J Financ 44:77–99CrossRef

Harris FHdeB, McInish TH, Wood RA (2002) Security price adjustment across exchanges: an investigation of common factor components for Dow stocks. J Financ Mark 5:277–308CrossRef

Hasbrouck J (1995) One security, many markets: determining the contributions to price discovery. J Financ 50:1175–1199CrossRef

Hasbrouck J (2002) Stalking the “efficient price” in market microstructure specifications: an overview. J Financ Mark 5:329–339CrossRef

Hasbrouck J (2003) Intraday price formation in U.S. Equity index markets. J Financ 58:2375–2399CrossRef

Hubermann G, Regev T (2001) Contagious speculation and a cure for cancer: a nonevent that made stock prices soar. J Financ 56:387–396CrossRef

Johansen S (1991) Estimation and hypothesis testing of cointegrating vectors in gaussian vector autoregressive models. Econometrica 59:1551–1580CrossRef

Kirilenko AA, Kyle AS, Samadi M, Tuzun T (2011) The flash crash: the impact of high frequency trading on an electronic market. SSRN. 10.2139/ssrn.1686004. Accessed 4 May 2014

Kyle AS (1985) Continuous auctions and insider trading. Econometrica 53:1315–1335CrossRef

Lehmann BN (2002) Some desiderata for the measurement of price discovery across markets. J Financ Mark 5:259–276CrossRef

Lien D, Shrestha K (2009) A new information share measure. J Futures Mark 29:377–395CrossRef

Lin CC, Chen SY, Hwang DY, Lin CF (2002) Does index futures dominate index spot? Evidence from Taiwan market. Rev Pac Basin Financ Mark Policies 5:255–275CrossRef

Martens M (1998) Price discovery in high and low volatility periods: open outcry versus electronic trading. J Int Financ Mark Inst Money 8:243–260CrossRef

Masset P, Wallmeier M (2010) A high-frequency investigation of the interaction between volatility and DAX returns. Eur Financ Manag 16:327–344CrossRef

Mizrach B, Neely CJ (2008) Information shares in the US treasury market. J Bank Financ 32:1221–1233CrossRef

Moeller T (2005) Let’s make a deal! How shareholder control impacts merger payoffs. J Financ Econ 76:167–190CrossRef

Nenova T (2003) The value of corporate voting rights and control: a cross-country analysis. J Financ Econ 68:325–351CrossRef

Peiers B (1997) Informed traders, intervention, and price leadership: a deeper view of the microstructure of the foreign exchange market. J Financ 52:1589–1614CrossRef

Poskitt R (2010) Price discovery in electronic foreign exchange markets: the sterling/dollar market. J Futures Mark 30:590–606

Rosenberg JV, Traub LG (2009) Price discovery in the foreign currency futures and spot market. J Deriv 17:7–25CrossRef

Rydqvist K (1996) Takeover bids and the relative prices of shares that differ in their voting rights. J Bank Financ 20:1407–1425CrossRef

Sapp SG (2002) Price leadership in the spot foreign exchange market. J Financ Quant Anal 37:425–448CrossRef

Schlusche B (2009) Price formation in spot and futures markets: exchange traded funds vs. index futures. J Deriv 17:26–40CrossRef

Schmidhammer C, Lobe S, Röder K (2014) The real benchmark of DAX index products and the influence of information dissemination: a natural experiment. J Asset Manag 15:129–149

Seyhun HN (1990) Overreaction or fundamentals: some lessons from insiders’ response to the market crash of 1987. J Financ 45:1363–1388CrossRef

Simpson MW, Moreno JF, Ozuna T (2012) The makings of an information leader: the intraday price discovery process for individual stocks in the DJIA. Rev Quant Financ Account 38:347–365CrossRef

Theissen E (2002) Price discovery in floor and screen trading systems. J Empir Financ 9:455–474CrossRef

Tse Y (2001) Index arbitrage with heterogeneous investors: a smooth transition error correction analysis. J Bank Financ 25:1829–1855CrossRef

Wallmeier M (2011) Beyond payoff diagrams: how to present risk and return characteristics of structured products. Financ Mark Portf Manag 25:313–338CrossRef

Wurgler J (2011) On the economic consequences of index-linked investing. Challenges to business in the twenty-first century. Rosenfeld G, Lorsch JW, Khurana R (eds) American Academy of Arts and Sciences 20–34

Yu S, Rentzler J, Tandon K (2010) Reexamining the uncertain information hypothesis on the S&P 500 index and SPDRs. Rev Quant Financ Account 34:1–21CrossRef

Titel: The day the index rose 11 %: a clinical study on price discovery reversal
verfasst von: Christoph Schmidhammer
Sebastian Lobe
Klaus Röder
Publikationsdatum: 01.01.2016
Verlag: Springer US
Erschienen in: Review of Quantitative Finance and Accounting / Ausgabe 1/2016
Print ISSN: 0924-865X
Elektronische ISSN: 1573-7179
DOI: https://doi.org/10.1007/s11156-014-0462-4

Springer Professional

Abstract

Bitte loggen Sie sich ein, um Zugang zu Ihrer Lizenz zu erhalten.

Sie haben noch keine Lizenz? Dann Informieren Sie sich jetzt über unsere Produkte:

Springer Professional "Wirtschaft+Technik"

Springer Professional "Wirtschaft"

Weitere Artikel der Ausgabe 1/2016

Corporate governance, SFAS 157 and cost of equity capital: evidence from US financial institutions

A theory of underwriters’ risk management in a firm-commitment initial public offering

Pre-evaluating technical efficiency gains from possible mergers and acquisitions: evidence from Japanese regional banks

Effects of frequent information disclosure: the case of daily net asset value reporting for closed-end investment companies

Performance effects of appointing other firms’ executive directors to corporate boards: an analysis of UK firms

Does free cash flow problem contribute to excess stock return synchronicity?