Statistical Evidence for Short-Run Dynamics Between Spot and Futures Equity Markets And Economic Value of Basis Trade Strategies: The Case of DAX

Abstract:     
The aim of this paper is to examine the existence of short–run lead–lag effects between the spot and the futures market in the German stock exchange and particularly the DAX index, over the period 1/2000 - 12/2003, using intradaily data. As long as such relationships are established we investigate the economic value of spread trades motivated by the abovementioned relationships.

To model the lead–lag effects we employ the multivariate Threshold Regression Model (TRM) of Tsay (1998) and for the economic value we use a reduced version of the methodology introduced by Fleming et al. (2001). Our main finding is that there exist quite robust short–run effects between the two markets across time. Also, there is some evidence for economic value in the basis–trade strategies which is totally diluted when realistic transaction costs apply.

Number of Pages in PDF File: 35

Keywords: DAX, spread trade, economic valuation

JEL Classification: C19, G19

working papers series