The Lead–Lag Relationship Between Stock Indices and Stock Index Futures Contracts: Further Australian Evidence

Abstract

This article examines the lead-lag relationship in returns on stock index futures and the underlying stock index for the Australian market between 1992 and 1997. On average across the sample period, futures returns lead index returns by twenty to twenty-five minutes and there is some evidence of feedback from the equities market to the futures market. Analysis conducted on a year-by-year basis suggests that the extent to which the futures market leads the equities market has decreased over time and the relationship between the two markets has generally strengthened. This is consistent with an increase in the level of integration between the markets. The results suggest that prior research that compares lead-lag relationships across international markets and time periods in drawing inferences on the effects of market structure needs to be interpreted with caution.

Examining the forward pricing function of the Australian equity index futures contract

“…Consequently, when the futures and spot prices fall out of their long-run equilibrium relationship, it is the futures market that makes all adjustments to restore the equilibrium. This result is consistent with the previous finding relating to the Australian equity index futures contract, where futures prices were found to lead the spot prices (Hodgson et al, 1993;Frino and West, 1999).…”

“…The first such study to appear in the published literature is by Hodgson et al (1993) and it documents a 30 minute lead by the futures market. Frino and West (1999) examined the lead-lag relationship in returns on the Australian stock index futures contract and reported evidence of the index futures leading the returns on the AOI by 20-25 min between 1992 and 1997. The authors also examined the individual years and suggest that the extent to which the futures market lead the spot market declined over time indicating the two markets had become more integrated.…”

Is carbon emissions trading profitable?

“…The importance of the maturation of the futures contract is explained well by Frino and West (1999), for instance. Their argument is that when the futures market is less mature it tends to lead the spot market because, as the futures market matures, it gets more integrated with the stock market.…”

Some Aspects of Application of VECM Analysis for Modeling Causal Relationships Between Spot and Futures Prices

“…These problems affect both the proper preparation of the data, as well as adjusting methodology, which is expected to correspond to the nature of the phenomena examined. [Nieto et al, 1998], [Chen, Zheng, 2008], [Green, Joujon, 2000]; 1-hour [Gwilym, Buckle, 2001]; 15-minutes [Gosh, 1993], [Hodgson et al, 2006], [Cheung, Ng, 1999]; 5-minutes [Stoll, Whaley, 1990], [Chiang, Fong, 2001], [Frino, West, 1999], [Abhyankar, 1998]; 1-minute [Dwyer et al, 1996], [Kawaller et al, 1988], [Pizzi et al, 1998]; tick-by-tick [Chu et al, 1999], [Fung, Jiang, 1999];…”