Intraday Lead/Lag Relationships between the Futures and Spot Market
Keywords:Cointegration, Causality, Price Discovery
This study investigates whether spot and futures markets are playing an important role in the assimilation of information and price discovery in the Indian stock market. For accomplishing this purpose, high frequency price data of 31 individual securities, observed at five minutes interval for the time period of April 2010 to March 2011 have been used. The present study applies the Johansen’s cointegration and Engle and Granger’s residual based approach to determine the long-run equilibrium between the two markets. Besides this, Granger causality test and VECM (Vector Error Correction Model) have been applied to determine the direction of causality and the leading market. The results of the study depict that there is a bi-directional information flows or feedback between the spot and futures markets in case of 30 securities and one security i.e. Wipro is showing unilateral relationship from spot to futures. As far as price discovery role of spot and futures markets is concerned, both markets are playing an important role implying that futures (spot) prices may contain useful information about spot (futures) prices. Besides this it is also evidenced that futures market is leading the spot market in case of 12 securities whereas 19 securities are being led by the spot market.