An alternative approach to investigating lead-lag relationships between stock and stock index futures markets

Brooks, C. ORCID: https://orcid.org/0000-0002-2668-1153, Garrett, I. and Hinich, M. J. (1999) An alternative approach to investigating lead-lag relationships between stock and stock index futures markets. Applied Financial Economics, 9 (6). pp. 605-613. ISSN 0960-3107 doi: 10.1080/096031099332050

Abstract/Summary

In the absence of market frictions, the cost-of-carry model of stock index futures pricing predicts that returns on the underlying stock index and the associated stock index futures contract will be perfectly contemporaneously correlated. Evidence suggests, however, that this prediction is violated with clear evidence that the stock index futures market leads the stock market. It is argued that traditional tests, which assume that the underlying data generating process is constant, might be prone to overstate the lead-lag relationship. Using a new test for lead-lag relationships based on cross correlations and cross bicorrelations it is found that, contrary to results from using the traditional methodology, periods where the futures market leads the cash market are few and far between and when any lead-lag relationship is detected, it does not last long. Overall, the results are consistent with the prediction of the standard cost-of-carry model and market efficiency.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/35968
Identification Number/DOI	10.1080/096031099332050
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting
Publisher	Taylor and Francis
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