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

• Main Authors: Mohammad Sifat, Imtiaz, Mohamad, Azhar, Amin, Kevin Reinaldo
• Format: Article
• Language: English; English; English
• Published: John Wiley and Sons Ltd 2020
• Subjects: HG4501 Stocks, investment, speculation
• Online Access: http://irep.iium.edu.my/84732/1/84732_Intertemporal%20price%20discovery%20between%20stock%20index%20futures.pdf; http://irep.iium.edu.my/84732/2/84732_Intertemporal%20price%20discovery%20between%20stock%20index%20futures_WoS.pdf; http://irep.iium.edu.my/84732/13/84732_Intertemporal%20price%20discovery%20between%20stock%20index%20futures_Scopus.pdf; http://irep.iium.edu.my/84732/; https://www.scopus.com/inward/record.uri?eid=2-s2.0-85088567878&doi=10.1002%2fijfe.1827&partnerID=40&md5=09565dd674ad0ed06cb7d7b58d74b598
• Institution: Universiti Islam Antarabangsa Malaysia

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.