A model of price discovery and market design: Theory and empirical evidence

Michael T. Chng*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

9 Citations (Scopus)


Price discovery is an essential function performed by derivative markets. For a derivative exchange, its markets' ability to incorporate information into prices to "derive" the underlying asset's value is a key objective of market design. The J. Hasbrouck (1991a) model is applied to examine the design and price discovery of a futures market. First, the model is extended to consider a comprehensive dynamic interaction between the price-size coordinates of orders and trades. Second, floor and screen tick data from LIFFE's FTSE 100 index futures market is used to estimate the two models. The significance of order size variables in the extended model suggests that order flow transparency, which is supported by an electronic trading platform, improves price discovery.

Original languageEnglish
Pages (from-to)1107-1146
Number of pages40
JournalJournal of Futures Markets
Issue number12
Publication statusPublished - Dec 2004
Externally publishedYes


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