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Intertemporal price discovery between stock index futures and spot markets: new evidence from high-frequency data

Mohammad Sifat, Imtiaz and Mohamad, Azhar and Amin, Kevin Reinaldo (2020) Intertemporal price discovery between stock index futures and spot markets: new evidence from high-frequency data. International Journal of Finance and Economics. E-ISSN 1099-1158

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Abstract

This article utilizes high-frequency 15-s intraday data from September 2017 through to August 2018 to investigate price leadership dynamics between Kuala Lumpur index futures (FKLI) and its underlying spot market: FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) in Bursa Malaysia. Harnessing the explanatory powers of Wavelet analysis, we employ Maximal Overlap Discrete Wavelet Transform to evaluate interdependence between contemporaneous futures and spot returns. We observe that price discovery between futures and spot markets at granular level is a scale-dependent phenomenon. Moreover, we record a counter-intuitive but not unprecedented evidence of futures market lagging the spot market in price formation. This discrepancy approaches convergence in 1–8 min. Our findings constitute evidence against the efficient market hypothesis and hint at opportunities for statistical arbitrage by high-frequency trading. The results from time-frequency domain receive strong support from vector error correction robustness checks, though corroboration is less conclusive from DCC-GARCH and Baba, Engle, Kraft, and Kroner-GARCH results.

Item Type: Article (Journal)
Additional Information: 3334/84732
Uncontrolled Keywords: high-frequency data, price discovery, stock index futures, wavelet, efficient market hypothesis, arbitrage
Subjects: H Social Sciences > HG Finance > HG4501 Stocks, investment, speculation
Kulliyyahs/Centres/Divisions/Institutes (Can select more than one option. Press CONTROL button): Kulliyyah of Economics and Management Sciences > Department of Finance
Depositing User: Dr Azhar Mohamad
Date Deposited: 14 Nov 2020 23:13
Last Modified: 25 Jan 2021 15:07
URI: http://irep.iium.edu.my/id/eprint/84732

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