Price Leadership between Spot and Futures Markets

This paper aims to study the relative information shares of spot and futures market at the individual stock level to measure the price discovery in spot and futures market in the Indian capital markets. We find that the spot and futures prices are co-integrated and mutually adjusting. Building on Information Share approach of Hasbrouck, the price discovery share of futures segment is about 36% compared to that of spot segment is 64%. It is expected that futures market contribute more towards price discovery given huge trading volumes and they carry the natural advantage of cost-effectiveness in terms of leverage benefit. However, the empirical result (or the fact) is spot market leadership in price discovery and this fact is reconciled by probing the clientele of futures market and is consistent with very active participation of retail traders in futures segment.