Information content and price reversals of extended trading for index futures

Abstract

Starting from November 20, 1998, the Hong Kong Futures Exchange extends its trading hours of Hang Seng Index Futures (HSIF) by opening 15 minutes earlier in the morning session, and closing 15 minutes later in the afternoon session. The longer trading period of the index futures contracts provides an opportunity for investors to trade on any new information in the absence of the underlying spot market. We modify the model from Hiraki, Maberly and Takezawa (1995) to accommodate the Hong Kong markets in which the morning session of the index futures market is also extended. Our results provide strong evidence to support Hiraki, Maberly and Takezawa ( 1995) that index futures returns from trading extension do contain private information which can be used to explain spot market returns for the later trading sessions. In addition, our result is consistent with Cushing and Madhavan (2000) that liquidity-driven trading may cause a reversal between the closing return and the next day's opening return in the futures market. This result indicates that liquidity trading effect dominates the private information effect in futures return between intervals where a non-trading period exists. We also find evidence to support Fung, Mok and Lam (2000) that price reversals relative to the opening prices exist within the futures and spot markets.