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

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  • 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 contemporaneously 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.

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  • Judge, Amrit & Reancharoen, Tipprapa, 2014. "An empirical examination of the lead–lag relationship between spot and futures markets: Evidence from Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 335-358.
    • Handle: RePEc:eee:pacfin:v:29:y:2014:i:c:p:335-358
    DOI: 10.1016/j.pacfin.2014.05.003
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    More about this item

    Keywords

    Market efficiency; Lead–lag relationship; Spot market: SET50 index; Futures market: SET50 index futures; Error correction model; Cost of carry model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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