The impact of transaction costs on price discovery: Evidence from cross-listed stock index futures contracts

Fleming et al. [J. Futures Markets 16 (1996) 353] hypothesise that 'price discovery will tend to occur first in the lowest-cost market, as information-based trades are executed where they produce the highest net profit'. This paper exploits the institutional differences between Nikkei 225 Stock Index futures trading on the Osaka Securities Exchange (OSE) and Singapore International Monetary Exchange (SIMEX) to provide new evidence on the 'transaction cost hypothesis'. The institutional differences between the two markets result in higher brokerage commissions and margins on the OSE relative to SIMEX. The analysis reported in this paper finds that both SIMEX and OSE Nikkei futures returns lead Nikkei 225 Index returns. However, a direct comparison of the rates of price discovery between the two futures contracts demonstrates that SIMEX futures returns strongly lead OSE futures returns. This evidence is consistent with the transaction cost hypothesis, and corroborates findings of earlier studies.