An Alternative Specification for Intraday Simultaneity in Spot and Futures Markets
Jeffrey M. Mercer
Texas Tech University - Department of Finance
QUARTERLY REVIEW OF ECONOMICS AND FINANCE, Vol. 37 No. 3, Fall 1997
Recent research demonstrates the importance of modeling intraday dynamic price relationships using high-frequency transactions data as simultaneous equations models to account for simultaneity in futures and spot prices. Motivated by theoretical and econometric considerations, this paper presents an alternative specification that accounts for both simultaneity and prior deviations from any long-run pricing association between the two price series. A comparison of the specification to prior work indicates that for the specific data examined, prior specifications fail to account for a significant component in these market microstructure relationships. Further, prior models are not robust to the misspecification, and when it is considered, an alternative view of intraday simultaneity in stock index futures markets is provided.
JEL Classification: C32, G12, G13
Date posted: September 24, 1997
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