Abstract
This study re-examines and reinterprets the empirical results of Brooks et al. (Citation1999) which investigated the lead–lag relationship between stock indices and stock index futures markets. Contrary to the contention of Brooks et al. that the stock index futures market leads the stock market, it is found that their linear Granger causality tests exhibit overwhelming evidence of a contemporaneous relationship and a bidirectional relationship between spot and futures returns. The interpretation of the empirical evidence of Brooks et al., although different from theirs, is equally supportive of the theoretical predictions of the cost-of-carry model and the efficient market hypothesis.
Notes
They have used daily returns of both the FTSE 100 and S&P indices and index future contracts over the period January 1985 to December 1993 and January 1983 to December 1993, respectively.
For example, see Abhyankar (Citation1998), Silvapulle and Moosa (Citation1999).
Alternatively, Silvapule and Moosa (1999, p. 189) have rationalized this feedback relationship by stating that, ‘although the futures market play bigger role in the price discovery process, the spot market also plays a role in this respect’.
Abhyankar (Citation1998), Silvapuule and Moosa (1999) also found that filtering the spot and futures price series by an EGARCH model substantially reduces both the magnitude and statistical significance of the test statistics in the non-linear Granger causality tests.