Physical settlement, liquidity, and price discovery in single stock futures; evidence from Panel Vector Error Correction Model

Key Points

• Price discovery mechanisms are significantly influenced by liquidity levels in single stock futures, and they exhibit complex interrelationships.
• The analysis uses a panel vector error correction model to untangle these relationships among various stock futures over time.
• Findings suggest that effective settlement processes enhance the liquidity of single stock futures, thereby improving price discovery efficacy.
• Implications highlight the need for deeper understanding of liquidity’s role in futures markets, especially in volatile conditions.