A study of the index-futures price relationship within the Malaysian stock index futures market

Ramasamy, Suganthi; Shanmugam, Bala
June 2004
Derivatives Use, Trading & Regulation;2004, Vol. 10 Issue 2, p156
Academic Journal
Many studies have been undertaken on the index--futures lead--lag in developed countries. Hardly any, however, have been focused on the Malaysian stock index futures market. This project focuses on the index--futures lead--lag in the Malaysian stock index futures market. The data used in this project were the daily closing prices for both stock index and stock index futures in Malaysia. The data, which cover the period from 15th December, 1995 to 30th June, 2001 were divided into three sub-periods in view of variation in activity largely due to the Asian financial crisis. The aim of this project is to determine whether there is any significant lead--lag relationship in terms of price index between the futures market and the stock market in Malaysia. The project generally found results indicating that the stock index futures returns led the stock index returns by one day during the learning periods and the stable period. The stock index futures returns, however, led the stock index returns by two days during the high volatility period. This means that during the high volatility period, the lead from stock index futures was greater than during the other sub-periods. The study also found the existence of a contemporaneous relationship between the stock index returns and the stock index futures returns in the Malaysian stock index and the stock index futures markets. Evidence also indicated that the two markets are highly cointegrated. Based on the findings of sub-period 3 (the current period), this project recommends that an investor should monitor the movements of the stock index futures returns because the previous day's and today's increase in stock index futures returns lead to an increase in today's stock index returns.


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