The lead–lag relationship between stock index and stock index futures: A thermal optimal path method

The study of lead–lag relationship between stock index and stock index futures is of great importance for its wide application in hedging and portfolio investments. Previous works mainly use conventional methods like Granger causality test, GARCH model and error correction model, and focus on the causality relation between the index and futures in a certain period. By using a non-parametric approach—thermal optimal path (TOP) method, we study the lead–lag relationship between China Securities Index 300 (CSI 300), Hang Seng Index (HSI), Standard and Poor 500 (S&P 500) Index and their associated futures to reveal the variance of their relationship over time. Our finding shows evidence of pronounced futures leadership for well established index futures, namely HSI and S&P 500 index futures, while index of developing market like CSI 300 has pronounced leadership. We offer an explanation based on the measure of an indicator which quantifies the differences between spot and futures prices for the surge of lead–lag function. Our results provide new perspectives for the understanding of the dynamical evolution of lead–lag relationship between stock index and stock index futures, which is valuable for the study of market efficiency and its applications.

[1]  A. Ghosh.  Cointegration and Error Correction Models: Intertemporal Causality Between Index Spot and Future Prices , 1993 .

[2]  D. Sornette,et al.  Lead-lag cross-sectional structure and detection of correlated–anticorrelated regime shifts: Application to the volatilities of inflation and economic growth rates , 2006, physics/0607197.

[3]  Martin T. Bohl,et al.  Price discovery and investor structure in stock index futures , 2011 .

[4]  Kanwalroop Kathy Dhanda,et al.  Index futures leadership, basis behavior, and trader selectivity , 2002 .

[5]  Prabina Rajib,et al.  Intraday return dynamics and volatility spillovers between NSE S&P CNX Nifty stock index and stock index futures , 2011 .

[6]  Efe Çaglar Çagli,et al.  The long-run relationship between the spot and futures markets under multiple regime-shifts: Evidence from Turkish derivatives exchange , 2013, Expert Syst. Appl..

[7]  A. Frino,et al.  The Lead–lag relationship between stock indices and stock index futures contracts : further Australian evidence , 1999 .

[8]  Didier Sornette,et al.  Non-parametric determination of real-time lag structure between two time series: The "optimal thermal causal path" method with applications to economic data , 2006 .

[9]  Jangkoo Kang,et al.  An Empirical Investigation of the Lead-Lag Relations of Returns and Volatilities among the KOSPI200 Spot, Futures and Options Markets and their Explanations , 2006 .

[10]  Z. Jinyu,et al.  Price discovery in index futures and spot market in China: Based on HS300 stock index futures , 2011, 2011 International Conference on Business Management and Electronic Information.

[11]  Joel Hasbrouck,et al.  Intraday Price Formation in Us Equity Index Markets , 2000 .

[12]  D. Sornette,et al.  The US Stock Market Leads the Federal Funds Rate and Treasury Bond Yields , 2011, PloS one.

[13]  G. Rajaguru,et al.  Investigation of a Lead-lag Relationship between Spot and Futures Indices of the Hang Seng Stock Average , 2007 .

[14]  Maosen Zhong,et al.  Price Discovery and Volatility Spillovers in Index Futures Markets: Some Evidence from Mexico , 2004 .

[15]  W. Chan,et al.  The Lead–Lag Relation between the S&P500 Spot and Futures Markets: An Intraday-Data Analysis Using a Threshold Regression Model , 2010 .

[16]  M. Nieto,et al.  Market efficiency in the Spanish derivatives markets: An empirical analysis , 1998 .

[17]  S. Shamsuddin,et al.  Relationship between Stock Futures Index and Cash Prices Index: Empirical Evidence Based on Malaysia Data , 2012 .

[18]  Mahmoud Wahab,et al.  Price dynamics and error correction in stock index and stock index futures markets: A cointegration approach , 1993 .

[19]  Brian Scott-Quinn,et al.  A further investigation of the lead‐lag relationship between the cash market and stock index futures market with the use of bid/ask quotes: The case of France , 1996 .

[20]  Abhay Abhyankar,et al.  Return and volatility dynamics in the FT‐SE 100 stock index and stock index futures markets , 1995 .

[21]  Adnan Kasman,et al.  The impact of futures trading on volatility of the underlying asset in the Turkish stock market , 2008 .

[22]  Ilias D. Visvikis,et al.  The Lead-Lag Relationship between Cash and Stock Index Futures in a New Market , 2008 .

[23]  Y. Tse,et al.  Price discovery in the German equity index derivatives markets , 1999 .

[24]  B. Derrida,et al.  Interface energy in random systems , 1983 .

[25]  Yoshio Iihara,et al.  Intraday return dynamics between the cash and the futures markets in Japan , 1996 .

[26]  Chris Brooks,et al.  A trading strategy based on the lead–lag relationship between the spot index and futures contract for the FTSE 100 , 2001 .

[27]  Attaullah Shah,et al.  Lead-Lag Relationship in Spot and Future Market: Evidence from Pakistani Stock Market KSE-100 Index , 2013, Business Review.

[28]  Y. Tse,et al.  Structural change and lead-lag relationship between the Nikkei spot index and futures price: a genetic programming approach , 2003 .

[29]  R. Zeckhauser,et al.  The Performance of Market Index Futures Contracts , 1983 .

[30]  Y. Tse,et al.  Price discovery on the S&P 500 index markets: An analysis of spot index, index futures, and SPDRs , 1999 .

[31]  D. Sornette,et al.  Non-Parametric Determination of Real-Time Lag Structure between Two Time Series: The 'Optimal Thermal Causal Path' Method , 2004 .

[32]  B. Derrida,et al.  Simple frustrated systems: chains, strips and squares , 1978 .

[33]  The dynamics of the relationship between spot and futures markets under high and low variance regimes , 2009 .

[34]  M. Pizzi,et al.  An examination of the relationship between stock index cash and futures markets: A cointegration approach , 1998 .

[35]  W. Chan,et al.  Threshold non-linear dynamics between Hang Seng stock index and futures returns , 2011 .

[36]  E. Theissen.  Price discovery in spot and futures markets: a reconsideration , 2012 .

[37]  Yiu Kuen Tse,et al.  Lead-lag relationship between spot index and futures price of the nikkei stock average , 1995 .