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Lead-lag relationship between spot and futures stock indexes: Intraday data and regime-switching models

Nuria Alemany, Vicent Aragó and Enrique Salvador

International Review of Economics & Finance, 2020, vol. 68, issue C, 269-280

Abstract: This paper analyzes the impact of arbitrage opportunity changes on the price discovery process between the DAX30 index and the DAX30 index future within a short time scale. To this end, we use 5-min data, regime-switching models and the regime-dependent impulse response function. The results unveil the presence of nonlinearities in the cointegrating vector and the shortcomings of relying on linear assumptions. We also find that the presence of arbitrage opportunities alters the nature of the lead-lag dynamics: the more arbitrage opportunities, the greater the leading role of the futures market and the more pronounced the impact of unexpected shocks on prices.

Keywords: Regime-switching models; Arbitrage opportunities; Lead-lag relationship; Intraday data (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 G15 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.iref.2020.03.009

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Handle: RePEc:eee:reveco:v:68:y:2020:i:c:p:269-280