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Price dynamics and error correction in stock index and stock index futures markets: A cointegration approach

Price dynamics and error correction in stock index and stock index futures markets: A... he temporal relation between stock index spot and futures markets has been, and continues to be, of interest to academicians, regulators, and practitioners alike for a variety of reasons. First, the issue is inextricably linked to few central notions in financial theory, notably market efficiency and arbitrage. In perfectly efficient markets, profitable arbitrage should not exist as prices adjust instantaneously and fully to new incoming information. Therefore, new information disseminating into the marketplace should be immediately reflected in spot and futures prices by triggering trading activity in one or both markets simultaneously so that there should be no systematic lagged responses long enough, or large enough to economically exploit, considering transaction costs. Second, it is often believed that futures markets potentially provide an important function of price discovery. If so, then futures prices or movements thereof should contain useful information about subsequent spot prices; beyond that already embedded in the current spot price. A third issue pertains to potential volatility-spillover effects of futures trading. Specifically, these markets have long been suspected of exerting a destabilizing influence on the underlying spot market. Although still largely unsettled at both the theoretical and empirical levels, there is some evidence that trade http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

Price dynamics and error correction in stock index and stock index futures markets: A cointegration approach

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References (47)

Publisher
Wiley
Copyright
Copyright © 1993 Wiley Periodicals, Inc., A Wiley Company
ISSN
0270-7314
eISSN
1096-9934
DOI
10.1002/fut.3990130702
Publisher site
See Article on Publisher Site

Abstract

he temporal relation between stock index spot and futures markets has been, and continues to be, of interest to academicians, regulators, and practitioners alike for a variety of reasons. First, the issue is inextricably linked to few central notions in financial theory, notably market efficiency and arbitrage. In perfectly efficient markets, profitable arbitrage should not exist as prices adjust instantaneously and fully to new incoming information. Therefore, new information disseminating into the marketplace should be immediately reflected in spot and futures prices by triggering trading activity in one or both markets simultaneously so that there should be no systematic lagged responses long enough, or large enough to economically exploit, considering transaction costs. Second, it is often believed that futures markets potentially provide an important function of price discovery. If so, then futures prices or movements thereof should contain useful information about subsequent spot prices; beyond that already embedded in the current spot price. A third issue pertains to potential volatility-spillover effects of futures trading. Specifically, these markets have long been suspected of exerting a destabilizing influence on the underlying spot market. Although still largely unsettled at both the theoretical and empirical levels, there is some evidence that trade

Journal

The Journal of Futures MarketsWiley

Published: Oct 1, 1993

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