The Temporal Price Relationship between S&P 500 Futures and the S&P 500 Index

Abstract

This paper empirically examines the intraday price relationship between S&P 500 futures and the S&P 500 index using minute‐to‐minute data. Three‐stage least‐squares regression is used to estimate lead and lag relationships with estimates for expiration days of the S&P 500 futures compared with estimates for days prior to expiration. The results suggest that futures price movements consistently lead index movements by twenty to forty‐five minutes while movements in the index rarely affect futures beyond one minute.

Intraday Price Discovery in the DJIA Index Markets

“…A variety of authors have examined the relationship between the S&P 500 index and index futures. Kawaller et al (1987), Stoll and Whaley (1990) and Chan (1992), among others, report the S&P 500 futures plays a dominant role in price discovery. Tse (1999 and 2001) finds evidence of a significant bidirectional information flow between the DJIA index and the floor‐traded futures, but reports the futures price leads the cash price in price discovery.…”

Risky short positions and investor sentiment: Evidence from the weekend effect in futures markets

“…Kawaller, Koch, and Koch (1987) examine the intraday price relationship between S&P 500 Index futures and the corresponding spot index and find that futures price movements consistently lead index movements but only by 20-45 min, which is too short to be captured by a weekend effect. One of the prominent reasons is arbitrage between futures and spot markets that would eliminate the weekend effect in certain securities.…”

“…The literature on price discovery confirms that, in general, futures markets lead spot markets but results are inconclusive for currency and Treasury bonds. Kawaller, Koch, and Koch (1987) examine the intraday price relationship between S&P 500 Index futures and the corresponding spot index and find that futures price movements consistently lead index movements but only by 20-45 min, which is too short to be captured by a weekend effect. Thus, arbitrage in currency, equity, and fixed income markets eliminates the possibility of a persistent weekend effect in their futures prices.…”

The impact of trading restrictions and margin requirements on stock index futures

“…It has been observed in many empirical studies that stock index futures prices are frequently divergent from and are in many instances below their theoretical values. This problem was interpreted first by Zeckhauser and Niederhoffer (1983) as the result of convenience of short selling in the futures market and its fast reaction to new information relative to the stock market, followed by Kawaller, Koch, and Koch (1987), Chan (1992), Pizzi, Economopoulos, and O'Neill (1998), and Ersoy and Çıtak (2015) along a similar line. On the other hand, Cornell and French (1983a, 1983b) considered it to be the consequence of taxing rather than market inefficiency, although they also pointed out that prohibiting short sales is another significant factor driving the futures price down because it impedes the arbitrage trading and attracts investors to the futures market.…”