Intraday price formation and bid–ask spread components: A new approach using a cross-market model


  • Ryu is grateful for the helpful comments and suggestions from Qian Han (the Discussant), Robert Webb (the Editor), Joseph Fung, William Fung, Biao Guo, Mark Holder, Richard Kent, Bernard Lee, Woo-baik Lee, Hae-Pil Ryu, Taewoo You, Tao Wu, and the seminar participants at the 21th Annual Asia-Pacific Futures Research Symposium in Singapore. Ryu also appreciates the great research assistants, Juhee Park and Doowon Ryu. This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government (NRF-2011-332-B00175).


This study examines the intraday formation process of transaction prices and bid–ask spreads in the KOSPI 200 futures market. By extending the structural model of Madhavan, A., Richardson, M., and Roomans, M. (1997), we develop a unique cross-market model that can decompose spread components and explain intraday price formation for the futures market by using the order flow information from the KOSPI 200 options market, which is a market that is closely related to the futures market as well as considered to be one of the most remarkable options markets in the world. The empirical results indicate that the model-implied spread and the permanent component of the spread that results from informed trading tend to be underestimated without the inclusion of options market information. Further, the results imply that trades of in-the-money options, which have high delta values, generally incur a more adverse information cost component (the permanent spread component) of the futures market than those of out-of-the-money options, which have relatively low delta values. Finally, we find that the adverse information cost component that is estimated from the cross-market model exhibits a nearly U-shaped intraday pattern; however, it sharply decreases at the end of the trading day. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark