Price discovery in single-stock futures: evidence from the Warsaw Stock Exchange

Purpose: The aim of the research is to assess the role of single-stock futures in the price discovery process on the Warsaw Stock Exchange. The paper seeks to determine whether the futures market contributes significantly to price discovery or if the spot market remains dominant. Design/methodology/approach: The study employs a two-dimensional vector error correction model (VECM) to describe the dynamics of the relationship between cointegrated spot and futures prices. The analysis is conducted for single stock futures with the highest multiplier (1000) and for underlying stocks. Based on the model, both short-term and long-term causal relationships are analysed and the relative contribution of the spot and futures markets to price discovery is determined for each of the eight pairs of analysed assets separately. Findings: The findings indicate that, on the WSE, the spot market generally plays a dominant role in the price discovery process, with an average contribution of 72.03%, compared to 27.97% for the single-stock futures market. Short- and long-term Granger causality tests confirmed that, in most cases, stock prices lead futures prices. This suggests that high leverage alone does not guarantee a strong price discovery role of futures. Research limitations/implications: The research focuses on only eight single-stock futures classes, with the highest contract multiplier, which may not fully represent the broader market. Future research could expand the analysis by incorporating derivatives with lower multipliers as well as making a combined analysis of the prices of stocks, single-stock futures, and index futures. Practical implications: The research highlights that, on the WSE, the spot market generally dominates the price discovery process. For investors in single-stock futures, this means that relying solely on futures market signals may not be sufficient for forecasting price movements. The study also indicates that high leverage does not guarantee a dominant role of futures in price discovery, which could influence trading strategies and risk management approaches. Economically, these findings can guide market participants in optimizing investment strategies and regulators in assessing the efficiency of the derivatives market. Originality/value: The paper provides a detailed analysis of the price discovery role of single- stock futures on the WSE, an area with limited prior research. Unlike previous studies, it examines both short- and long-term causal relationships for selected high-multiplier futures contracts, offering new insights into market efficiency. The study is valuable for investors, traders, and regulators by clarifying the dominant role of the spot market and highlighting factors influencing futures market efficiency. It is particularly relevant for financial analysts, policymakers, and market participants seeking to improve trading strategies and market oversight. Keywords: price discovery, single-stock futures, Granger causality. Category of the paper: Research paper.