The Evolution of Price Discovery in US Equity and Derivatives Markets

Abstract

This paper investigates changes in the price discovery portions for two popular securities based on the S&P 500 index, namely the S&P 500 E-mini futures and the SPDR Exchange Traded Fund (Ticker SPY) for the period Jan 2002 through Dec 2013. We show a significant change in the price discovery of these two securities over this period. The E-mini futures are dominant for price discovery until 2007, though on a steady decline. After 2007 the SPY ETF dominates the price discovery process.