Information Shares in Foreign Currency Futures and Spot Markets

This paper studies price discovery across the Electronic Broking Services (EBS) interdealer spot market and the electronic and floor-traded futures markets in the Chicago Mercantile Exchange (CME) for EUR-USD and JPY-USD exchange rates, covering the period from January 2004 to December 2005. Due to the lack of available high-frequency spot data, previous investigations of the price discovery of foreign exchange spot and futures markets use data over a few months. By adopting the approaches of Hasbrouck (1995), Gonzalo and Granger (1995), and Lien and Shrestha (2009) to measure price discovery among these markets, this study reveals that the EBS spot rates dominate and are more important to price discovery than CME futures rates. Moreover, the electronic GLOBEX futures market contributes substantially more to price discovery than does the floor-traded futures market. The results indicate that a market's contribution to price discovery increases with trading volume but decreases with volatility. These findings support the hypothesis that relative liquidity and volatility jointly influence variation in price discovery between markets over time.