An empirical examination of the lead–lag relationship between spot and futures markets: evidence from Thailand

Judge, Amrit; Reancharoen, Tipprapa

Abstract

This study investigates whether a lead–lag relationship exists between the spot market and the futures market in Thailand during the period 2006 through 2012. In a rational, efficient market, returns on derivative securities and their underlying assets should be perfectly contempora-neously correlated. However, due to market imperfections, one of these two markets may reflect information faster. Using daily data, our results show that there is a price discovery in the Thailand futures market. We find that lagged changes in spot prices lead changes in futures prices. Our results are robust to the use of an alternative equity index. Our results show that the error correction model, which utilizes the traditional linear model, is found to be the best forecasting model. Furthermore, we find that a trading strategy based on this model outperforms the market even after allowing for transaction costs.

Citation

Judge, A., & Reancharoen, T. (2014). An empirical examination of the lead–lag relationship between spot and futures markets: evidence from Thailand. Pacific-Basin Finance Journal, 29, 335-358. https://doi.org/10.1016/j.pacfin.2014.05.003

• Journal Article Type: Article
• Acceptance Date: May 6, 2014
• Online Publication Date: Jun 3, 2014
• Publication Date: 2014-09
• Deposit Date: Mar 4, 2019
• Journal: Pacific-Basin Finance Journal
• Print ISSN: 0927-538X
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 29
• Pages: 335-358
• DOI: https://doi.org/10.1016/j.pacfin.2014.05.003
• Keywords: Economics and econometrics; Finance
• Public URL: https://nottingham-repository.worktribe.com/output/1602944
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S0927538X14000572
• Additional Information: This article is maintained by: Elsevier; Article Title: An empirical examination of the lead–lag relationship between spot and futures markets: Evidence from Thailand; Journal Title: Pacific-Basin Finance Journal; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.pacfin.2014.05.003; Content Type: article; Copyright: Copyright © 2014 Elsevier B.V. All rights reserved.