Price Discovery in the Hang Seng Index Markets:
Index, Futures, and the Tracker Fund
Raymond W. So
Department of Finance
Chinese University of Hong Kong
Shatin, Hong Kong
Yiuman Tse
College of Business
Department of Finance
University of Texas
San Antonio, TX 78249-0633
October 30, 2002October 28, 2002
Price Discovery in the Hang Seng Index Markets:
Index, Futures and the Tracker Fund
ABSTRACT
In this paper, price discovery among the Hang Seng Index markets is investigated via the Hasbrouck and Gonzalo and Granger information sharing techniques and the Mulitvariate Generalized Autoregressive Conditional Heteroskedasticity (M-GARCH) model. Using data from Hong Kong’s Hang Seng Index, Hang Seng Index futures and the Tracker Fund, empirical evidence shows that the movements of the three markets are interrelated. The futures markets contain most information, followed by the spot market. The Tracker Fund does not contribute to the price discovery process. In terms of volatility spill overs, the three markets exhibit spillover effects, indicating that their second moments are linked together, although the flow of information from the Tracker Fund to the other markets is minimal. Overall results suggest that the three markets have different degrees of information processing abilities, though they are governed by the same set of macroeconomic fundamentals.
JEL Classification: G15
Key Words: Hang Seng Index, Hong Kong, M-GARCH, Information Sharing
Price Discovery in the Hang Seng Index Markets: Index, Futures, and the Tracker Fund
I. Introduction and Background
Recent developments in trading and telecommunication technologies have increased the information efficiency of financial markets. As a result, market participants can access and assimilate information at low cost and asset prices can rapidly reflect the information. Under an efficient market, information processing should be expeditious and the most information...