Time-Varying Price Discovery and Autoregressive Loading Factors: Evidence from S&P 500 Cash and E-Mini Futures Markets

The error correction coefficients, known as the loading factors, are a key component for price discovery measurement. To date, only constant loading factors have been considered for the price discovery measurement. This paper attempts to consider the autoregressive loading factors and their implications for the price discovery measurement. Based on the minute-by-minute data from the S&P 500 cash and E-mini futures markets, this paper reveals that the loading factors are indeed autoregressive. Furthermore, we propose three AR(1) processes for the loading factors and assess their performance in price discovery measurement compared to the constant loading factor model. Overall, this research provides supporting empirical evidence for using autoregressive loading factors for the price discovery measurement.