Lead-Lag Relationship between the Spot Index and Futures Price for the Turkish Derivatives Exchange

Abstract

This paper examines the lead-lag relationship between the Istanbul Stock Exchange 30 (ISE 30) Index and index futures prices at the Turkish Derivatives Exchange using daily observations from February 2005 to May 2008. It is found out that spot prices lead the futures prices for ISE 30 Index contrary to the results for different countries. Besides, the forecasting performances of Error Correction Model (ECM), ECM with Cost of Carry (COC), Autoregressive Integrated Moving Average (ARIMA) and Vector Autoregressive (VAR) Model are compared. The results support the superior performance of ECM. This study underlines the difference in direction of the lead-lag relation for Turkey that has a significant value for traders, and the performance of ECM for forecasting purposes.

Keywords: Stock Index Futures, ISE 30 Index, Error Correction Model, Cost of Carry Model, Forecasting, Lead-Lag Relation

JEL Classification: C22, G10