Information Content of Implicit Spot Prices Embedded in Single Stock Future Prices: Evidence from Indian Market

摘要

This study examines the information content of pricing error, measured by the difference between the implied price computed using the cost of carry model and the spot price of Single Stock Futures (SSFs), traded on National Stock Exchange (NSE), India. The returns of portfolios, based on ranking of such pricing errors, are investigated. The consistency of results is verified by controlling for established risk factors, that is, market, size, value and momentum premium, and idiosyncratic factors such as firm's liquidity and size. Our study reveals that the pricing error is a priced risk factor that contains incremental information about stock returns of day t, and not beyond. We conclude that implied spot prices from stock futures market are useful for traders to profit in the spot market.