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Wavelet Analysis of the Cost-of-Carry Model

Listed author(s):
  • Lin Shinn-Juh

    (National Tsing Hua University)

  • Stevenson Maxwell

    (University of Technology, Sydney)

Registered author(s):

    In this paper, it is shown how one can employ the wavelet analysis to reconstruct data based only on the subset of information that differentiates the two fundamentally related time series: spot and futures indices. Such an analysis allows researchers to focus on examining the relationship between the two price series. Furthermore, it also enables examination and comparison of reconstructed prices based on different levels of information detail. It is found that the lead-lag relationship described in the empirical literature still exists between the spot and the futures index prices. Such a relationship is more persistent when more detailed information is used for price reconstruction. This implies that, if market imperfection is to be blamed for the noncontemporaneous relationship between the spot and the futures indices, one should concentrate solely on those imperfections that are likely to occur within very short time horizons.

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    File URL: https://www.degruyter.com/view/j/snde.2001.5.1/snde.2001.5.1.1073/snde.2001.5.1.1073.xml?format=INT
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    Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

    Volume (Year): 5 (2001)
    Issue (Month): 1 (April)
    Pages: 1-17

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    Handle: RePEc:bpj:sndecm:v:5:y:2001:i:1:n:7
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    1. Bradford Cornell & Kenneth R. French, 1983. "The pricing of stock index futures," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 3(1), pages 1-14, 03.
    2. Jensen, Mark J., 2000. "An alternative maximum likelihood estimator of long-memory processes using compactly supported wavelets," Journal of Economic Dynamics and Control, Elsevier, vol. 24(3), pages 361-387, March.
    3. Mahmoud Wahab & Malek Lashgari, 1993. "Price dynamics and error correction in stock index and stock index futures markets: A cointegration approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(7), pages 711-742, October.
    4. Davidson, Russell & Labys, Walter C & Lesourd, Jean-Baptiste, 1998. "Wavelet Analysis of Commodity Price Behavior," Computational Economics, Springer;Society for Computational Economics, vol. 11(1-2), pages 103-128, April.
    5. Mark J. Jensen, 1997. "Using Wavelets to Obtain a Consistent Ordinary Least Squares Estimator of the Long Memory Parameter," Econometrics 9710002, EconWPA.
    6. 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(04), pages 441-468, December.
    7. Cornell, Bradford & French, Kenneth R, 1983. " Taxes and the Pricing of Stock Index Futures," Journal of Finance, American Finance Association, vol. 38(3), pages 675-694, June.
    8. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    9. Pan, Zuohong & Wang, Xiaodi, 1998. "A Stochastic Nonlinear Regression Estimator Using Wavelets," Computational Economics, Springer;Society for Computational Economics, vol. 11(1-2), pages 89-102, April.
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