The South African Share Index Futures and Share Markets : Efficiency and Causality Revisited

In this paper the efficiency of the stock index futures market and the underlying spot market is investigated over the period January 2, 1996 to June 29, 2001. In addition to examining the whole data set, the sample was also divided into four subsamples, each of which was analysed independently. The four subsamples included a pre-crisis or tranquil period, a crisis period, a transition period and, finally, a post-crisis period. The crisis period spans the time of the Asian financial crisis whereas the transition period incorporates two events which may have impacted on market efficiency - the Russian ruble crisis and the South African rand crisis. We tested for unit roots, market cointegration and Granger causality with vector error correction and found that the two markets were relatively inefficient during the pre-crisis period but that efficiency improved following the onset of the crisis. The futures market proved to be the dominant market in the long-run during all four subsample periods since it was primarily responsible for maintaining its equilibrium relationship with the underlying spot market. Over the short-term, the futures return was found to lead or Granger-cause the spot return during the pre-crisis period, but this was reversed during the crisis period. No short-term causality relationship could be detected for the transition and post-crisis periods. Futures prices are expected to lead spot prices because of lower transaction costs and less restrictive short-selling in the futures market. We speculate that the anomaly, i.e., the spot price lead, during the crisis period reflect investor behaviour during times of uncertainty and distress when more value is attached to the underlying asset than to past performance or future prospects of the derivative instrument.