The Lead–Lag Relation between the S&P500 Spot and Futures Markets: An Intraday-Data Analysis Using a Threshold Regression Model

12 Pages Posted: 22 Feb 2010

See all articles by Yiu Kuen Tse

Yiu Kuen Tse

Singapore Management University - School of Social Sciences

Wai Sum Chan

The Chinese University of Hong Kong (CUHK) - Department of Finance

Abstract

In this paper we examine the lead–lag interaction between the futures and spot markets of the S&P500 using the threshold regression model on intraday data. The use of threshold variables to model the changes in the regression structure with respect to different market conditions enables us to investigate the lead–lag interaction in a data-based approach and avoid stratifying the data arbitrarily. Using the basis as the threshold variable, we find that the short-selling restrictions in the spot market reduce the effect of the spot index as the leading variable. To study the effect of market-wide information on the interaction between the spot and futures markets, we use the coefficient of determination in the regression of the S&P500 on the Morgan–Stanley Composite Index-US and the Major Market Index as the threshold variable. We find that the lead effect of the futures market over the spot market is stronger when there is more market-wide information. On the other hand, the lead effect of the cash market over the futures market is weaker when there is more market-wide information. In addition, we also use the lagged 45-min return of the spot market as the threshold variable. We find that the lead effect of the spot market is stronger in periods of directionless trading than in periods of good or bad markets.

Suggested Citation

Tse, Yiu Kuen and Chan, Wai-Sum, The Lead–Lag Relation between the S&P500 Spot and Futures Markets: An Intraday-Data Analysis Using a Threshold Regression Model. Japanese Economic Review, Vol. 61, Issue 1, pp. 133-144, March 2010. Available at SSRN: https://ssrn.com/abstract=1554704 or http://dx.doi.org/10.1111/j.1468-5876.2009.00481.x

Yiu Kuen Tse (Contact Author)

Singapore Management University - School of Social Sciences ( email )

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Wai-Sum Chan

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

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