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INFORMATION AND NOISE IN FINANCIAL MARKETS



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The Journal of Financial Research Vol XXXI No 3 Pages 247 270 Fall 2008 INFORMATION AND NOISE IN FINANCIAL MARKETS EVIDENCE FROM THE E MINI INDEX FUTURES Alexander Kurov West Virginia University Abstract I examine the informational contributions and effects on transitory volatility of trades initiated by different types of traders in three actively traded index futures markets The results show that trades initiated by exchange member firms account for more than 60 of price discovery during the trading day These institutional trades appear to be more informative than trades of individual exchange members or off exchange traders I also find that off exchange traders introduce more noise into the prices than do exchange members My findings provide new evidence on the role of different types of traders in the price formation process JEL Classification G10 G14 I Introduction I examine the roles of different types of traders in the price discovery process and their effect on transitory volatility in index futures markets First I analyze the relative information content of trades initiated by individual exchange members exchange member firms and off exchange traders in three E mini index futures markets Kurov and Lasser 2004 use Hasbrouck s 1995 information share approach to show that individual exchange members make larger informational contributions than off exchange traders or clearing member firms Consistent with Kurov and Lasser I find that the informational contributions of off exchange traders are relatively small However the results also show that exchange member firms contribute significantly more to price discovery than do individual members or offexchange traders Trades of exchange member firms appear to be more informative than trades of other traders These results show that institutional traders now play a dominant informational role in electronic index futures markets I thank Lou Abarcar Arabinda Basistha Robert Daigler the referee Upinder Dhillon Grigori



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