Electronic trading systems and intraday non-linear dynamics: An examination of the FTSE 100 cash and futures returns

Bea Canto and Roman Kräussl

No 2007/20, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: This paper focuses on dynamic interactions of equity prices among theoretically related assets. We explore the existence of intraday non-linearities in the FTSE 100 cash and futures indices. We test whether the introduction of the electronic trading systems in the London Stock Exchange in 1997 and in the London International Financial Futures and Options Exchange (LIFFE) in 1999 has eliminated the non-linear dynamic relationship in the FTSE 100 markets. We show that the introduction of the electronic trading systems in the FTSE 100 markets has increased the efficiency of the markets by enhancing the price discovery process, namely by facilitating the increase of the speed of adjustment of the futures and cash prices to departures of the mispricing error from its non-arbitrage band. Nevertheless, we conclude that the automation of the markets has not completely eliminated the non-linear properties of the FTSE 100 cash and futures return series.

Keywords: Intraday non-linearities; Dynamic Spillovers; Electronic Trading Systems; Price Discovery Process; Cost of Carry Model; Regime Switching Model; Vector Error Correction Mechanism; SETAR Model (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200720

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