Compared to data used in previous studies, the sample in this paper is particularly interesting and valuable, as the Chinese derivatives markets underwent dramatic up and down swings and abrupt regulatory changes during the sample period.
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The literature has shown significant evidence that supports the trading cost hypothesis: the dominant price discovery role in the derivatives markets is attributed to their relatively lower transaction cost. This sample period enables us to test this hypothesis because substantial and almost exogenous changes in the transaction cost occurred within several years.
Moreover, the results show that bivariate analysis that considers only futures or options market overestimates the contribution of the derivative market to price discovery, which confirms the importance of analyzing spot, futures and options markets jointly.
Finally, this paper explores factors that affect the time variation in price discovery of the derivatives. The results show that in the options market, the price discovery role is positively correlated with trading volume and negatively correlated with return volatility, which is consistent with the literature. In other words, more trading activities and smaller uncertainty are conducive to better price discovery. In the futures market, however, the trading volume is not significantly associated with the strength of price discovery.
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Interestingly, in neither futures nor options markets, price discovery is significantly affected by relative transaction costs. This finding is not consistent with the trading cost hypothesis. Euronext operates regulated and transparent equity and derivatives markets and is the largest centre for debt and funds listings in the world.
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