IDEAS home Printed from https://ideas.repec.org/a/eee/stapro/v154y2019ic1.html
   My bibliography  Save this article

No arbitrage and lead–lag relationships

Author

Listed:
  • Hayashi, Takaki
  • Koike, Yuta

Abstract

The existence of time-lagged cross-correlations between the returns of a pair of assets, which is known as the lead–lag relationship, is a well-known stylized fact in financial econometrics. Recently some continuous-time models have been proposed to take account of the lead–lag relationship. Such a model does not follow a semimartingale as long as the lead–lag relationship is present, so it admits an arbitrage without market frictions. In this paper we show that they are free of arbitrage if we take account of market frictions such as the presence of minimal waiting time on subsequent transactions or transaction costs.

Suggested Citation

  • Hayashi, Takaki & Koike, Yuta, 2019. "No arbitrage and lead–lag relationships," Statistics & Probability Letters, Elsevier, vol. 154(C), pages 1-1.
    • Handle: RePEc:eee:stapro:v:154:y:2019:i:c:1
    DOI: 10.1016/j.spl.2019.06.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167715219301646
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.spl.2019.06.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:dau:papers:123456789/9300 is not listed on IDEAS
    2. Takaki Hayashi & Yuta Koike, 2016. "Wavelet-based methods for high-frequency lead-lag analysis," Papers 1612.01232, arXiv.org, revised Nov 2018.
    3. Yuri Kabanov, 2009. "Markets with Transaction Costs. Mathematical Theory," Post-Print hal-00488168, HAL.
    4. Lo, Andrew W & MacKinlay, A Craig, 1990. "When Are Contrarian Profits Due to Stock Market Overreaction?," The Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 175-205.
    5. Michael H. Breitner & Christian Dunis & Hans-Jörg Mettenheim & Christopher Neely & Georgios Sermpinis & Hamad Alsayed & Frank McGroarty, 2014. "Ultra‐High‐Frequency Algorithmic Arbitrage Across International Index Futures," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 33(6), pages 391-408, September.
    6. Robert, Christian Y. & Rosenbaum, Mathieu, 2010. "On the limiting spectral distribution of the covariance matrices of time-lagged processes," Journal of Multivariate Analysis, Elsevier, vol. 101(10), pages 2434-2451, November.
    7. Paolo Guasoni, 2006. "No Arbitrage Under Transaction Costs, With Fractional Brownian Motion And Beyond," Mathematical Finance, Wiley Blackwell, vol. 16(3), pages 569-582, July.
    8. de Jong, Frank & Nijman, Theo, 1997. "High frequency analysis of lead-lag relationships between financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 259-277, June.
    9. Nicolas P.B. Bollen & Michael J. O'Neill & Robert E. Whaley, 2017. "Tail Wags Dog: Intraday Price Discovery in VIX Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(5), pages 431-451, May.
    10. Walter Schachermayer, 2004. "The Fundamental Theorem of Asset Pricing under Proportional Transaction Costs in Finite Discrete Time," Mathematical Finance, Wiley Blackwell, vol. 14(1), pages 19-48, January.
    11. Kawaller, Ira G & Koch, Paul D & Koch, Timothy W, 1987. "The Temporal Price Relationship between S&P 500 Futures and the S and P 500 Index," Journal of Finance, American Finance Association, vol. 42(5), pages 1309-1329, December.
    12. Nijman, T.E. & de Jong, F.C.J.M., 1997. "High frequency analysis of lead-lag relationships between financial markets," Other publications TiSEM f4f406a0-771a-4af2-9364-6, Tilburg University, School of Economics and Management.
    13. (**), Christophe Stricker & (*), Miklós Rásonyi & Yuri Kabanov, 2002. "No-arbitrage criteria for financial markets with efficient friction," Finance and Stochastics, Springer, vol. 6(3), pages 371-382.
    14. Frank De Jong & Monique W. M. Donders, 1998. "Intraday Lead-Lag Relationships Between the Futures-, Options and Stock Market," Review of Finance, European Finance Association, vol. 1(3), pages 337-359.
    15. Paolo Guasoni & Mikl'os R'asonyi & Walter Schachermayer, 2008. "Consistent price systems and face-lifting pricing under transaction costs," Papers 0803.4416, arXiv.org.
    16. Pakkanen, Mikko S. & Sottinen, Tommi & Yazigi, Adil, 2017. "On the conditional small ball property of multivariate Lévy-driven moving average processes," Stochastic Processes and their Applications, Elsevier, vol. 127(3), pages 749-782.
    17. Chan, Kalok, 1992. "A Further Analysis of the Lead-Lag Relationship between the Cash Market and Stock Index Futures Market," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 123-152.
    18. Stoll, Hans R. & Whaley, Robert E., 1990. "The Dynamics of Stock Index and Stock Index Futures Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(4), pages 441-468, December.
    19. Poshakwale, Sunil & Theobald, Michael, 2004. "Market capitalisation, cross-correlations, the lead/lag structure and microstructure effects in the Indian stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(4), pages 385-400, October.
    20. Kohei Chiba, 2019. "Estimation of the lead–lag parameter between two stochastic processes driven by fractional Brownian motions," Statistical Inference for Stochastic Processes, Springer, vol. 22(3), pages 323-357, October.
    21. Paolo Guasoni & Emmanuel Lépinette & Miklós Rásonyi, 2012. "The fundamental theorem of asset pricing under transaction costs," Finance and Stochastics, Springer, vol. 16(4), pages 741-777, October.
    22. Hasanjan Sayit, 2013. "Absence of arbitrage in a general framework," Annals of Finance, Springer, vol. 9(4), pages 611-624, November.
    23. Chordia, Tarun & Sarkar, Asani & Subrahmanyam, Avanidhar, 2011. "Liquidity Dynamics and Cross-Autocorrelations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(3), pages 709-736, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Takaki Hayashi & Yuta Koike, 2017. "No arbitrage and lead-lag relationships," Papers 1712.09854, arXiv.org.
    2. Takaki Hayashi & Yuta Koike, 2016. "Wavelet-based methods for high-frequency lead-lag analysis," Papers 1612.01232, arXiv.org, revised Nov 2018.
    3. Christoph Kuhn, 2023. "The fundamental theorem of asset pricing with and without transaction costs," Papers 2307.00571, arXiv.org.
    4. Yi-Tsung Lee & Wei-Shao Wu & Yun Yang, 2013. "Informed Futures Trading and Price Discovery: Evidence from Taiwan Futures and Stock Markets," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(3), pages 219-242, September.
    5. Sarveshwar Kumar Inani, 2017. "Price discovery in Indian stock index futures market: new evidence based on intraday data," International Journal of Indian Culture and Business Management, Inderscience Enterprises Ltd, vol. 14(1), pages 23-43.
    6. Lepone, Andrew & Yang, Jin Young, 2013. "Informational role of market makers: The case of exchange traded CFDs," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 84-92.
    7. Martin Brown & Tomasz Zastawniak, 2020. "Fundamental Theorem of Asset Pricing under fixed and proportional transaction costs," Annals of Finance, Springer, vol. 16(3), pages 423-433, September.
    8. Kim, Jun Sik & Ryu, Doojin, 2014. "Intraday price dynamics in spot and derivatives markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 394(C), pages 247-253.
    9. Christoph Kühn & Alexander Molitor, 2022. "Semimartingale price systems in models with transaction costs beyond efficient friction," Finance and Stochastics, Springer, vol. 26(4), pages 927-982, October.
    10. Cho, Jin-Wan & Shin, Jhinyoung & Singh, Rajdeep, 2004. "The generality of spurious predictability," Finance Research Letters, Elsevier, vol. 1(4), pages 203-214, December.
    11. Paolo Guasoni & Miklós Rásonyi & Walter Schachermayer, 2010. "The fundamental theorem of asset pricing for continuous processes under small transaction costs," Annals of Finance, Springer, vol. 6(2), pages 157-191, March.
    12. Christoph Kuhn & Alexander Molitor, 2020. "Semimartingale price systems in models with transaction costs beyond efficient friction," Papers 2001.03190, arXiv.org, revised Aug 2021.
    13. de Jong, Frank & Nijman, Theo, 1997. "High frequency analysis of lead-lag relationships between financial markets," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 259-277, June.
    14. Minho Kim & Andrew C. Szakmary & Thomas V. Schwarz, 1999. "Trading costs and price discovery across stock index futures and cash markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 19(4), pages 475-498, June.
    15. Chen, Wei-Peng & Chung, Huimin & Lien, Donald, 2016. "Price discovery in the S&P 500 index derivatives markets," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 438-452.
    16. José Da Fonseca & Riadh Zaatour, 2017. "Correlation and Lead–Lag Relationships in a Hawkes Microstructure Model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 37(3), pages 260-285, March.
    17. Stanislaus Maier-Paape & Andreas Platen, 2015. "Lead-Lag Relationship using a Stop-and-Reverse-MinMax Process," Papers 1504.06235, arXiv.org.
    18. Stanislaus Maier-Paape & Andreas Platen, 2016. "Lead–Lag Relationship Using a Stop-and-Reverse-MinMax Process," Risks, MDPI, vol. 4(3), pages 1-20, July.
    19. Lepinette, Emmanuel & Tran, Tuan, 2017. "Arbitrage theory for non convex financial market models," Stochastic Processes and their Applications, Elsevier, vol. 127(10), pages 3331-3353.
    20. Noussair, C.N. & Tucker, S. & Xu, Yilong, 2014. "A Future Market Reduces Bubbles but Allows Greater Profit for More Sophisticated Traders," Other publications TiSEM 43ded173-9eee-48a4-8a15-6, Tilburg University, School of Economics and Management.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:stapro:v:154:y:2019:i:c:1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/622892/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.