Price discovery on the Johannesburg Stock Exchange: Examining the impact of the SATRIX Top 40 Exchange Traded Fund

Abstract

Price discovery refers to flows of information, describing how and when information is reflected in market prices. It is not unusual for there to be more than one financial instrument in a given market that is linked to, or derived from, a single specific asset. This results in a complex set of relationships where market news is not only reflected by price changes in one asset, but may be reflected in a number of different assets, potentially at different points in time. Given the arbitrage potential of less than instantaneous price changes, studies of price discovery aim to determine which market reflects new information first. This study is the first to examine the price discovery process on the South African Johannesburg Stock Exchange since several significant market changes occurred, including the introduction of Exchange Traded Funds (ETFs). This paper examines the FTSE/JSE Top 40 Index, the Top 40 Index Futures and the SATRIX Top 40 ETF for the period 2003-2015. Findings demonstrate that the introduction of ETFs has not significantly impacted on the direction of the price discovery process. Return to equilibrium price occurs more quickly when the ETF is considered suggesting that the ETF contributes to an improvement in the price discovery process between spot and futures, however, further research is required in order to determine the nature of this relationship. Despite several changes to the market over the course of the most recent decade, the futures market remains the leading point in the price discovery process.

Keywords: Price discovery; SATRIX 40; FTSE/JSE Top 40.