SETS, Arbitrage Activity, and Stock Price Dynamics

Nick Taylor, Dick van Dijk, Philip Hans Franses, André Lucas

Research output: Working paperProfessional

Abstract

This paper provides an empirical description of the relationshipbetween the trading system operated by a stockexchange and the transaction costs faced by heterogeneous investors who use the exchange. The recent introduction ofSETS in the London Stock Exchange provides an excellent opportunity to study the impact of an electronic trading systemupon transaction costs and the time taken to carry out a trade. Using the cost-of-carry model of futures prices we estimate(non-linearly) the transaction costs and trade speeds faced by arbitragers who take advantage of mispricing of FTSE100futures contracts relative to the spot prices of the stocks that make up the FTSE100 stock index. We divide the sample periodinto pre-SETS and post-SETS sample periods and conduct a comparative study of arbitrager behaviour under differenttrading systems. The results indicate that there has been a significant reduction in the level of transaction costs faced byarbitragers and in the degree of transaction cost heterogeneity since the introduction of SETS. Finally, generalised impulseresponse functions show that both spot and futures prices adjust more quickly in the post-SETS period.
Original languageEnglish
Place of PublicationAmsterdam
PublisherTinbergen Instituut
Publication statusPublished - 1999

Publication series

NameDiscussion paper TI
No.99-003/4

Fingerprint

Arbitrage
Stock prices
Price dynamics
Transaction costs
Futures prices
Spot price
Stock index
Comparative study
Trading systems
London Stock Exchange
Costs
Investors
Electronic trading
Impulse response function
Mispricing

Cite this

Taylor, N., van Dijk, D., Franses, P. H., & Lucas, A. (1999). SETS, Arbitrage Activity, and Stock Price Dynamics. (Discussion paper TI; No. 99-003/4). Amsterdam: Tinbergen Instituut.
Taylor, Nick ; van Dijk, Dick ; Franses, Philip Hans ; Lucas, André. / SETS, Arbitrage Activity, and Stock Price Dynamics. Amsterdam : Tinbergen Instituut, 1999. (Discussion paper TI; 99-003/4).
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Taylor, N, van Dijk, D, Franses, PH & Lucas, A 1999 'SETS, Arbitrage Activity, and Stock Price Dynamics' Discussion paper TI, no. 99-003/4, Tinbergen Instituut, Amsterdam.

SETS, Arbitrage Activity, and Stock Price Dynamics. / Taylor, Nick; van Dijk, Dick; Franses, Philip Hans; Lucas, André.

Amsterdam : Tinbergen Instituut, 1999. (Discussion paper TI; No. 99-003/4).

Research output: Working paperProfessional

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Taylor N, van Dijk D, Franses PH, Lucas A. SETS, Arbitrage Activity, and Stock Price Dynamics. Amsterdam: Tinbergen Instituut. 1999. (Discussion paper TI; 99-003/4).