Impact of spot trading activity on the futures-spot relationship
Authors: Shih-Ju Chan; Hsinan Hsu; Ching-Chung Lin; Chien-I Chen
Journal: Chia Da Management Review. Jun. 2007, 27(1): 169-194.
Keywords: Index Futures; Price Discovery; Trading Activity
Abstract:
Past empirical results show that the increase of trading volume of futures contract will result in the increase of its leading position. This
study investigates whether the change in the spot trades will have a reverse effect on the price discovery capability of futures. The study
period is from 2002/8 to 2003/3, in which the relative changes in trading activities of three Taiwanese index spot and futures systems provide
the necessary five-minute intraday price data to test the hypothesis. By employing ECM and EGARCH to explore the price discovery and the
volatility spillover for three spot-futures systems, this article finds that, during the second study period, the leading capability of TAIEX
index futures is decreased, while those of electronic index futures and financial index futures are increased. These results are coincident
with the anticipations of the research hypothesis. The empirical finding supports the hypothesis that the trading activity of spot has impact
on the price discovery capability of futures contracts.